Does extreme climate exacerbate the risk spillover in green finance markets? evidence from a multi-horizon investment perspective

Abstract

Green finance is playing an increasingly important role in building an innovative financial system. However, faced with the growing frequency of extreme weather and external shocks, the stable operation of the green finance market is under pressure and challenge. Given the high-dimensional nature and the variation of financial risk contagion across different time scales, this paper introduces the HD-TVPVAR-BK (high-dimensional time-varying frequency domain) spillover index model to analyze the risk spillover among major financial institutions within China’s green finance market under different investment horizons. Moreover, a GARCH-MIDAS-EC mixed-frequency model is constructed to explore the multi-horizon driving impact of extreme climate on the risk spillover of the green finance market. The results show that short-term risk spillovers are the main contributors to risk contagion among financial institutions in the green finance market, far exceeding the risk spillover in the long term, and the risk spillover in the short-term is more significant in the face of external shocks, indicating a stronger immediate market response to exogenous events. Extreme weather is an important catalyst exacerbating risk spillover in the green finance market, with a more prominent impact on short-term investment horizons. Different extreme climate conditions have varying impacts on risk spillovers in the green finance market, with the long-term effects of extreme precipitation being more profound compared to extreme low temperatures and high temperatures. The results of this paper reveal for the first time the impact of different climatic conditions on cross-term risk contagion in the green finance market, providing new evidence for the effective prevention of extreme weather shocks to the financial market.