Do climate change and geopolitical risk influence volatility? Empirical evidence from leading economies.

Abstract

Our study addresses the two novel objectives: 1) to study the impact of global climate change on stock market volatility, and 2) to study the impact of geopolitical risk on stock market volatility. With 21 years of high-frequency daily stock market returns data for the ten most influential economies encompassing the period from January 2003 to December 2022 (available until December 2022), we find high volatility in the stock markets of Italy, the United Kingdom and Germany due to global climate change and high volatility in the Indian stock market due to geopolitical uncertainty, while the USA and Japan are seen with volatility dampening due to geopolitical uncertainty. Due to the mixed-frequency datasets of dependent and independent variables, we employ the novel GARCH-MIDAS methodology to estimate our results. The originality of our study lies in the adoption of a novel methodology and the creation of a high-frequency dataset for 21 years during which the world has witnessed major geopolitical and climatic disruptions. Our results call for major policy interventions by governments worldwide to mitigate the risks posed by global climate change, adopt more stringent regulations to manage geopolitical uncertainty, and stabilize their financial markets. Additionally, this analysis extends the discussion beyond generic conclusions and provides more discerning policy implications concerning the unique vulnerabilities and resilience factors that each economy is endowed with. Overall, our study has larger implications and calls for international cooperation by the countries to design effective policies to address these pressing issues.