Research On The Impact Of Climate Risk On Cross-Market Contagion Of Systemic Financial Risk

Climate change is one of the major factors leading to structural changes in the economic and financial system.The influence of climate risk on systemic financial risk has always been an important academic frontier in finance research.Recently,China is the world’s largest emitter of greenhouse gases and energy consumer,and it is also a sensitive and influential area of global climate change.Meanwhile,with the acceleration of global financial integration and China’s financial market opening process,China is facing significant impacts of cross-border financial risks.Under this background,it is of great practical significance to deeply study the relationship between climate risk and dynamic evolution of financial risks cross-market contagion.Existing research mostly focus on the single market or integrate financial system as a whole into traditional macroeconomic models combined with climate stress test to measure climate-related financial risks,and the related cross-market research is limited.In fact,a high systematic connectedness has become the core feature of the financial system.Losses of a single financial market is likely to spread and endanger the overall stability of financial system.For macroprudential supervision of climate risks,it is necessary to understand how climate risks spread to the whole financial system through network from the network perspective,so as to provide guidance for predicting the evolution of climate-related systemic risks.Recently,a few scholars incorporate the macro-financial network based on financial contracts into the macro-economic model to analyze impacts of climate risk.However,in this kind of research,the macro model assumption and parameter design are usually fixed.Contrary,with the change of financial structure and the increase of climate uncertainty,the role of climate change in systemic risk contagion presents nonlinear characteristics such as time-varying,which is difficult for traditional macroeconomic models to describe.Based on the above two considerations,this paper considered the financial system including stock,bond,commodity and foreign exchange market,combined with frontier network topology method and quantile regression model,constructed a nonlinear connectedness network of financial market and climate risk,and deeply analyzed the impact of climate risk on cross-market contagion of systemic risk and its dynamic evolution.Additionally,from the dimensions of economic fundamentals and investor attention,this paper discusses whether policy uncertainty and investor attention are the driving factors of the impact of climate risk on systemic risk cross-market contagion.The main research contents and conclusions are as follows:Firstly,this paper uses variance decomposition spillover index based on TVP-VAR model to analyze the dynamic connectedness and changing trend of volatility spillover between climate risk and financial system.The empirical results show that climate risk has risk spillover effects on all kinds of financial markets,and some markets have spillover enhancement phenomenon,although the total risk spillover of climate risk to the financial system shows a slow weakening time trend.Then the variance decomposition network method is used to construct a complex information spillover network,and the risk contagion characteristics of climate risk within the financial system after major climate shocks are further analyzed from the network perspective.The results show that climate risk not only fluctuate a single financial market,but also increases the risk spillover between financial markets,causing financial market risk co-movement and increasing potential systemic risk.specifically,the stock and bond market play main risk disseminators in climate risk contagion.In addition,the quantile regression model is constructed to investigate impacts of climate risk on cross-market contagion of systemic risk under different market conditions,and it is found that there is an inverted U-shaped relationship between them.With market risk rises,the positive impact of climate risk on systemic risk cross-market contagion first increases and then decreases.Secondly,this paper investigates whether policy uncertainty is the factor driving the relationship between climate risk and cross-market contagion of systemic risk.For duration of risk spillover,the BK spillover index method based on the generalized variance decomposition spectrum is used to investigate the dynamic connectedness between climate policy uncertainty and financial system in the short,medium and long term from the perspective of frequency domain.Empirical results show that climate policy uncertainty have risk spillovers on financial markets in the short,medium and long term,and the total spillover in the time domain is mainly dominated by short-term risk spillover.From the time dimension,the longterm risk spillover of climate policy uncertainty to stock and bond markets shows a slow upward trend,especially in the bond market.In addition,this paper constructs mean regression and quantile regression models to analyze the driving effect of climate policy uncertainty on the cross-market contagion of systemic risk in different frequency domains.It is found that the short and long-term impact of climate policy uncertainty is more significant when the market risk is low,while the medium-term impact is non-significant.Subsequently,based on the nonlinear Granger causality test,we confirm the driving transmission relationship among climate risk,climate policy uncertainty and the cross-market contagion of systemic risk.Finally,this paper investigates whether investor attention drives the relationship between climate risk and cross-market contagion of systemic risk.This paper first constructs the indicators of investor attention to climate change based on the existing articles,then analyzes risk spillovers of investor attention to climate change on the financial system from time and frequency domain.Then,impacts of investor attention to climate change on cross-market contagion of systemic risk under different quantiles is investigated.The empirical results show that investor attention to climate change have risk spillovers to the financial system in both the short and long term,and are mainly dominated by the short term.The risk spillover of stock and bond market from investor attention to climate change showed a slow downward time trend,among which the bond market is the most significant.Additionally,the positive impact of investor attention to climate change on cross-market contagion of systemic financial risks is a short-term effect and its effects are more significant when the market risk is high.Subsequently,based on the non-linear Granger causality test,this paper examines the driving transmission relationship among climate risk,investor attention to climate change and cross-contagion of systemic risk.The research in this paper is helpful to better understand the materializing and the mechanism of climate-related systemic risk,enriches the theoretical system and method research of climate risk research,and expands the research on the relationship between climate risk and financial stability.It also has important practical significance for the establishment of prevention,control and early-warning mechanism about climate risk and macro-prudential risk prevention and control under China’s carbon-neutral target.