Climate change and financial stability: Natural disaster impacts on global stock markets

This paper aims to provide a statistical analysis of the impacts of worldwide climate 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 heterogeneous stock markets 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. Climatological and biological calamities seem the disaster types which, overall, induce the most extreme reactions of international financial markets. Furthermore, the analysed stock indexes are more responsive to shocks occurring in European countries. Finally, to predictively validate our model, we build a natural disaster risk hedging strategy, which sheds light on the investment opportunities derived from the mitigation of natural risks.