Common volatility shocks driven by the global carbon transition

Journal article

We propose a novel approach to measure the global effects of climate change news on financial markets. For that purpose, we first calculate the global common volatility of the oil and gas industry. Then we project it on climate-related shocks constructed using text-based proxies of climate change news. We show that rising concerns about the energy transition make oil and gas share prices move at the global scale, controlling for shocks to the oil price, US and world stock markets. Despite the clear exposure of oil and gas companies to carbon transition risk, not all geoclimatic shocks are alike. The signs and magnitudes of the impacts differ across climate risk drivers. Regarding sentiment, climate change news tends to create turmoil only when the news is negative. Moreover, the adverse effect is amplified by oil price movements but weakened by stock market shocks. Finally, our findings point out climate news materialises when it reaches the global scale, supporting the relevance of modelling geoclimatic volatility.

Authors: Campos-Martins, S; Hendry, D

• Publication status: Published
• Peer review status: Peer reviewed
• Publisher: Elsevier
• Journal: Journal of Econometrics
• Volume: 239
• Issue: 1
• Article number: 105472
• Publication date: 2023-06-23
• Acceptance date: 2023-05-29
• DOI: 10.1016/j.jeconom.2023.05.008
• EISSN: 1872-6895
• ISSN: 0304-4076
• Language: English
• Keywords: multiplicative factor models; oil and gas industry; geoclimatic volatility shocks; global common volatility; climate transition risk