Climate risks and forecasting stock market returns in advanced economies over a century
Publication date
2023-04-27
Document type
Forschungsartikel
Author
Organisational unit
Publisher
MDPI
Series or journal
Mathematics
ISSN
Periodical volume
11
Periodical issue
9
Article ID
2077
Peer-reviewed
✅
Part of the university bibliography
✅
Language
English
Keyword
International stock markets
Climate risks
Returns forecasting
Stock market connectedness
Abstract
In this study, we contribute to the rapidly growing climate-finance literature by shedding light on the question of whether climate risks have predictive value for stock market returns. We measure climate risks in terms of both the change in the northern hemisphere temperature anomaly and its volatility and the change in the global temperature anomaly and its volatility. We study monthly data for eight advanced countries (Canada, France, Germany, Italy, Japan, Switzerland, the United Kingdom (UK), and the United States (US)). Our sample period runs from 1916 to 2021. We control for cross-market spillovers of stock market returns and volatility as well as other risks including oil-price returns and volatility, geopolitical risks, and the gold-to-silver price ratio as a measure of investor risk aversion. Given this large array of control variables, we apply the Lasso estimator to trace out the incremental predictive value of climate risks for subsequent stock market returns. We find that climate risks do not have systematic predictive value for subsequent stock market returns. We then extend our analysis in two ways. First, we show that climate risks have short-term out-of-sample predictive value for the connectedness of stock market returns. Second, we show that climate risks have predictive power for stock market returns when we study monthly historical UK data for the sample period from 1772 to 2021.
Description
This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https://creativecommons.org/licenses/by/4.0/).
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