A0302
Title: Extreme climate and natural disaster risk in financial markets: A CoES approach
Authors: Lidia Sanchis-Marco - University of Castilla-La Mancha (Spain) [presenting]
Laura Garcia-Jorcano - Universidad de Castilla-La Mancha (Spain)
Abstract: The financial impact of extreme climate and natural disaster (EC\&ND) events is analyzed for S\&P 500 sectors, focusing on their role in increasing market and systemic risk. Using the conditional autoregressive expected shortfall (CARES) model, sector-specific losses are estimated and forecasted by incorporating EC\&ND variables. An enhanced conditional expected shortfall model is also introduced to assess systemic risk through the dependence between financial sector losses and overall system losses. Compared to traditional models such as value-at-risk (VaR) and conditional VaR, this approach provides a more detailed understanding of tail risk under climate stress. Results show that EC\&ND variables significantly increase estimated and forecasted losses, especially in energy, real estate, and insurance, the sectors most sensitive to climate extremes. Two new metrics, the disaster market ratio and the systemic risk ratio, are also proposed to quantify these effects. Overall, findings emphasize the urgent need to integrate EC\&ND risk into financial regulation and policy frameworks to strengthen systemic resilience. By linking climate risk to financial stability, practical insights are provided for regulators, investors, and academics.
