Is there a relation between stock markets and climate change?
by Myeong Hwan Kim; Yongseung Han
Global Business and Economics Review (GBER), Vol. 28, No. 3, 2023

Abstract: While economic growth has resulted in a secular upward trend in the performance of the stock market, the associated rise in economic activity has been responsible for the increase in carbon dioxide (CO₂) emissions. The rise in emission levels has contributed to the phenomenon of global warming or climate change. Conversely, climate change may affect equity markets by the uncertainty which it produces. What is hypothesised in this study is that there should be an observable long-term secular trend in the US equity markets, and there should also be the seasonal variations described by other researchers. Taking this one step further, the increased CO₂ emissions, if correlated with increased private productivity, should result in higher values for the underlying equities, than would be captured by a time linear time trend. Thus, this paper empirically examines the two-way relationship of variations in temperatures with the variations in equity market indices. The results provide evidence that there is a strong causal relationship from the changes in equity market indices to the changes in temperature levels, but there is no causal relationship in the opposite direction.

Online publication date: Tue, 04-Apr-2023

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