Climatic Change and Financial Stability: Natural Disaster Impacts on Global Stock Markets

Abstract This paper aims to provide a comprehensive study of the impacts of worldwide climatic change and consequent natural disasters on international stock markets. By means of a suited event study methodology, we investigate the effects of biological, climatological, geophysical, hydrological and metereological disasters occurred in 104 countries across the world on 27 global stock market indexes over the period 8 February 2001 to 31 December 2019. We find diverse stock market responses to natural hazard shocks depending on the type of event under consideration, as well as on the location in which the event has occurred. We discover that climatological and biological calamities are the disaster types which induce the most extreme reactions of international financial markets, followed by geophysical ones. Furthermore, the examined stock indexes are, on average, considerably responsive to shocks occurring in countries belonging to the European continent, which, overall, tend to affect in a negative way their performances. Finally, our empirical investigation sheds light on the diversification opportunities arising from the mitigation of natural catastrophe risks, by providing evidence on the sensitivity of stock indexes to disaster-specific and country-specific natural hazards. A natural disaster risk hedging strategy highlights the diversification opportunities arising from the mitigation of natural catastrophe risks, by providing evidence on the profitability of trading stock indexes hedging for specific natural hazard sources, and particularly climatological and biological ones.JEL codes: G15, G18, G41, Q54