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

Can variations in temperature explain the systemic risk of European firms?
Can variations in temperature explain the systemic risk of European firms?
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.
Conditional Value at Risk, Systemic risk, Climate change, Temperature
0924-6460
1723-1759
Tzouvanas, Panagiotis
f8c0fae8-aebe-406b-9df5-e40fd4c81fbb
Kizys, Renatas
9d3a6c5f-075a-44f9-a1de-32315b821978
Chatziantoniou, Ioannis
46fa1039-98bb-4997-b9f7-3ead71be79aa
Sagitova, Roza
8078d5ad-a6eb-4c6d-8281-080c0375dd76
Tzouvanas, Panagiotis
f8c0fae8-aebe-406b-9df5-e40fd4c81fbb
Kizys, Renatas
9d3a6c5f-075a-44f9-a1de-32315b821978
Chatziantoniou, Ioannis
46fa1039-98bb-4997-b9f7-3ead71be79aa
Sagitova, Roza
8078d5ad-a6eb-4c6d-8281-080c0375dd76

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), 1723-1759. (doi:10.1007/s10640-019-00385-0).

Record type: Article

Abstract

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.

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Accepted/In Press date: 22 October 2019
e-pub ahead of print date: 2 November 2019
Published date: December 2019
Keywords: Conditional Value at Risk, Systemic risk, Climate change, Temperature

Identifiers

Local EPrints ID: 434718
URI: http://eprints.soton.ac.uk/id/eprint/434718
ISSN: 0924-6460
PURE UUID: 7a17e9c3-7bc6-4b38-b36d-8e11c31783eb
ORCID for Renatas Kizys: ORCID iD orcid.org/0000-0001-9104-1809

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Date deposited: 07 Oct 2019 16:30
Last modified: 28 Apr 2022 06:28

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Contributors

Author: Panagiotis Tzouvanas
Author: Renatas Kizys ORCID iD
Author: Ioannis Chatziantoniou
Author: Roza Sagitova

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