Forecasting international financial stress : the role of climate risks
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Date
Authors
Del Fava, Santino
Gupta, Rangan
Pierdzioch, Christian
Rognone, Lavinia
Journal Title
Journal ISSN
Volume Title
Publisher
Elsevier
Abstract
We study the predictive value of climate risks for subsequent financial stress in a sample of
daily data running from October 2006 to December 2022 of thirteen countries, which include
China, ten European Union (EU) countries, the United Kingdom (UK), and the United States
(US). The climate risk indicators are the result of a text-based approach which combines the
term frequency-inverse document frequency and the cosine-similarity techniques. Given the
persistence of financial stress as well as the importance of spillover effects of financial stress
from other countries, we use random forests, a machine-learning technique tailored to handle
many predictors, to estimate our forecasting models. Our findings show that climate risks tend to
have a moderate impact, albeit in several cases statistically significant, on predictive accuracy,
which tends to be stronger, in our cross-section of countries, on a daily than at a weekly
or monthly forecast horizon of financial stress. Furthermore, the predictive value of climate
risks for financial stress is heterogeneous across the countries in our sample, implying that a
univariate forecasting model appears to be better suited than a corresponding multivariate one.
Finally, the predictive value of climate risks for financial stress appears to be stronger in several
countries at the lower conditional quantiles of financial stress.
Description
DATA AVAILABILITY : Data will be made available on request.
Keywords
Financial stress, Climate risks, Random forests, Forecasting, SDG-08: Decent work and economic growth, SDG-13: Climate action
Sustainable Development Goals
SDG-08:Decent work and economic growth
SDG-13:Climate action
SDG-13:Climate action
Citation
DelFava, S., Gupta, R., Pierdzioch, C. et al. 2024, 'Forecasting international financial stress : the role of climate risks', Journal of International Financial Markets,
Institutions & Money, vol. 92, art. 101975, pp. 1-22.
https://DOI.org/10.1016/j.intfin.2024.101975.