Climate Risk and Predictability of Global Stock Market Volatility
Mingtao Zhou and Yong Ma (Hunan University)
March 2024
Our study investigates the informative role of climate risk in improving the predictability of global stock market volatility. By extracting the composite component from the four individual climate risk proxies of Faccini et al. (2023), we show that aggregate climate risk is a significantly positive predictor of stock volatility across 32 international markets. This predictability persists in out-of-sample tests and cannot be subsumed by relevant economic and financial uncertainty measures. However, the predictive power of aggregate climate risk exhibits noteworthy variations over time and across regions; it weakens when economic conditions deteriorate, while it strengthens in regions with advanced financial development, high energy dependence, and strong climate change readiness. Moreover, by dissecting the multi-facets of climate risk, we demonstrate that physical risks, especially natural disasters, have much stronger predictability than transition risks.
Daily Archives: November 8, 2024
Macro Briefing: 8 November 2024
The policy-sensitive US 2-year Treasury yield fell on Wednesday as the Federal Reserve announced a widely-expected 1/4-point cut in its target rate. Despite the slide in the 2-year yield, it’s unclear if the upside trend will pause or reverse. The 2-year yield is widely followed as a proxy for near-term policy expectations. As of yesterday’s close, the 2-year yield, at 4.20%, remains modestly below the 4.50%-4.75%, which implies a forecast for another rate cut. Fed funds target range. Fed funds futures are pricing in a 71% probability for a 1/4 rate cut at next month’s FOMC meeting.
