Impact of Climate Change on Equity Markets

Abstract: Climate change and its effects on our daily life are one of the most visited research topics in the last few years. A growing number of this literature focuses on the impact of climate change on the economy and financial markets, and the threat it may pose on long-term investments. In this study, we examine the relationship between equity returns and climate risk factors using a revised version of the ND-GAIN vulnerability and readiness index along with macroeconomic and global control factors for 45 countries over 80 quarters from 2001Q1 till 2020Q4. We further examine the impact of climate risk factors on equity returns for a different group of countries which represent some commonalities such as development, geographical position, and weather-based factors. We employ a fixed effect panel regression model with modifications towards cross-section independence and white residuals. We are using seemingly unrelated regression (SUR) features of generalized least squares (GLS) and white (diagonal) standard errors. We find that equity returns are negatively correlated with the climate vulnerability index and positively correlated with the climate readiness index at the full panel sample. Implementing our novel clustering strategies, we also find that there are significant contrasts among countries clustered based on some commonalities.