Assessing the impacts of climate change to financial stability: evidence from China

Abstract

Purpose: Climate change not only causes serious economic losses but also influences financial stability. The related research is still at the initial stage. This paper aims to examine and explore the impact of climate change on financial stability in China. Design/methodology/approach: This paper first uses vector autoregression model to study the impact of climate change to financial stability and applies NARDL model to assess the nonlinear asymmetric effect of climate change on China’s financial stability using monthly data from 2002 to 2018. Findings: The results show that both positive and negative climate shocks do harm to financial stability. In the short term, the effect of positive climate shocks on financial stability is greater than the negative climate shocks in the current period, but less in the lag period. In the long term, negative climate shocks bring larger adjustments to financial stability relative to positive climate shocks. Moreover, compared with the short-term effect, climate change is more destructive to financial stability in the long run. Originality/value: The paper provides a quantitative reference for assessing the nexus between climate change and financial stability from a nonlinear and asymmetric perspective, which is beneficial for understanding climate-related financial risks.