Can variations in temperature explain the systemic risk of European firms?

Panagiotis Tzouvanas, Renatas Kizys, Ioannis Chatziantoniou, Roza Sagitova

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We employ a ΔCoVaR model in order to measure the potential impact of temperature fluctuations on systemic risk, considering all companies from the STOXX Europe 600 Index, which covers a wide range of industries for the period from 1/1/1990 to 29/12/2017. Furthermore, in this study, we decompose temperature into 3 factors; namely (1) trend, (2) seasonality and (3) anomaly. Findings suggest that, temperature has indeed a significant impact on systemic risk. In fact, we provide significant evidence of either positive or nonlinear temperature effects on financial markets, while the nonlinear relationship between temperature and systemic risk follows an inverted U-shaped curve. In addition, hot temperature shocks strongly increase systemic risk, while we do witness the opposite for cold shocks. Additional analysis shows that deviations of temperature by 1C can increase the daily Value at Risk by up to 0.24 basis points. Overall, higher temperatures are highly detrimental for the financial system. Results remain robust under the different proxies that were employed to capture systemic risk or temperature.
Original languageEnglish
Article number0
Pages (from-to)1723-1759
Number of pages37
JournalEnvironmental and Resource Economics
Issue number4
Publication statusPublished - 2 Nov 2019


  • Conditional Value at Risk
  • Systemic risk
  • Climate change
  • Temperature


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