Climate Risk Transmission: An Analysis of Cross-Market Spillover Effects in Financial and Commodity Markets

Abstract

Climate change continues to impact asset pricing through severe weather losses and low-carbon transition adjustments. This study uses the Transition Risk Impact Index (TRI) and the Physical Risk Impact Index (PRI) constructed based on Reuters news texts, and matches daily data from six markets-carbon futures, gold, global equities, insurance, agriculture, and clean energy-to construct two sets of seven-variable VAR systems. Directional spillovers over 2-day, 5-day, and 10-day forecast periods are measured using generalized forecast error variance decomposition, and dynamic changes are examined using a 252-trading-day rolling window. Results show that in both comparable systems, the directional TO estimate of TRI is higher than that of PRI across all three periods; agriculture remains the largest receiving market for TRI, while the main receiving market for PRI has shifted from short-term insurance and medium-term equities to long-term gold. Rolling results indicate that high values of TRI in the medium to long term are adjacent to periods of significant climate policy adjustments, while high values of PRI are more dispersed. This study reveals the differences in the association between climate risk impacts from news texts across different asset classes and forecast periods, providing a quantitative reference for cross-market climate risk identification and asset allocation.