Can variations in temperature explain the systemic risk of European firms?

Tzouvanas, Panagiotis, Kizys, Renatas, Chatziantoniou, Ioannis and Sagitova, Roza (2019) Can variations in temperature explain the systemic risk of European firms? Environmental and Resource Economics, 74 (4). pp. 1723-1759. ISSN 0924-6460

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We employ a ∆CoVaR model in order to measure the potential impact of temperature fluctuations on systemic risk, considering all companies from the STOXX Europe 600 Index, which covers a wide range of industries for the period from 1/1/1990 to 29/12/2017. Furthermore, in this study, we decompose temperature into 3 factors; namely (i) trend, (ii) seasonality and (iii) anomaly. Findings suggest that, temperature has indeed a significant impact on systemic risk. In fact, we provide significant evidence of either positive or nonlinear temperature effects on financial markets, while the nonlinear relationship between temperature and systemic risk follows an inverted U-shaped curve. In addition, hot temperature shocks strongly in-crease systemic risk, while we do witness the opposite for cold shocks. Additional analysis shows that deviations of temperature by 1◦C can increase the daily Value at Risk by up to 0.24 basis points. Overall, higher temperatures are highly detrimental for the financial system. Results remain robust under the different proxies that were employed to capture systemic risk or temperature.

Item Type: Article
Keywords: Conditional Value at Risk, Systemic risk, Climate change, Temperature
Schools and Departments: University of Sussex Business School > Accounting and Finance
Research Centres and Groups: Business and Finance Research Group
Subjects: Q Science > QC Physics > QC0851 Meteorology. Climatology Including the earth's atmosphere > QC0980 Climatology and weather > QC0981.8.A-Z Special topics, A-Z > QC0981.8.C5 Climate change
Depositing User: Panagiotis Tzouvanas
Date Deposited: 23 Oct 2019 18:52
Last Modified: 10 Dec 2019 10:45

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