Climate change effects and their implications for the financial markets: Evidence from the United Kingdom

This study aims to examine how the climate affects the behaviour of the stock market. To achieve this, we have drawn on daily data from Jan 2005 to Jan 31, 2023 and several environmental factors (e.g., temperature, humidity, cloud cover and visibility) to account for extreme weather conditions using...

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Bibliographic Details
Published in:Journal of environmental management 2024-08, Vol.366, p.121782, Article 121782
Main Authors: Ahmed, Rizwan, Chen, Xihui Haviour, Hoang, Yen Hai, Do-Linh, Chi
Format: Article
Language:English
Subjects:
Climate Change
Extreme climate
Investments
Salience theory
Stock returns
United Kingdom
Volatility
Weather
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Summary:This study aims to examine how the climate affects the behaviour of the stock market. To achieve this, we have drawn on daily data from Jan 2005 to Jan 31, 2023 and several environmental factors (e.g., temperature, humidity, cloud cover and visibility) to account for extreme weather conditions using the 21-day moving average and its standard deviation. The empirical analysis has revealed three key findings regarding the impact of weather on the stock market's behaviour. First, various forms of extreme weather conditions consistently lead to influence stock behaviour. Second, results provide valuable insights into market behaviour and help investors to make more informed investment decisions. Third, the weather conditions have new information about the climate risk and investors should react to it swiftly in light of our findings. The saliency theory can help reconcile the theoretical conflicts between the real options and risk-shifting theories when it comes to investing in uncertain and extreme climate conditions. •Daily stock market data from 2005 to 2023, including weather factors.•Extreme weather conditions consistently affect stock market behavior.•Our results help investors make more informed decisions considering climate risks.•Weather conditions indicate climate risk, urging swift investor response.•Saliency theory reconciles real options and risk-shifting in climate uncertainty.
ISSN:0301-4797
1095-8630
1095-8630
DOI:10.1016/j.jenvman.2024.121782