Projecting stock market impacts of climate change via rational bubble models

Fry, John

Abstract

In this paper we develop a rational bubble model to quantify the susceptibility of global stock markets to future temperature rises. The approach builds on existing theory incorporating the unpredictable timing of future Black-Swan events alongside price risks that increase in line with global temperature. An alternative specification where climate-change risks are instead linked to atmospheric carbon dioxide levels is also given. The approach offers simplicity, transparency and allows national-level effects to be estimated. In the short-term prices are artificially inflated and volatility artificially deflated as temperatures rise. This is in-line with previous work suggesting carbon-related risks are under-priced by markets. We use our model to estimate stock-market exposure to future climate-change risks given future global temperature rises and increases in atmospheric $CO_2$. The potential effects are considerable once global temperatures increases beyond $2^0C$ above pre-industrial levels. We find that climate-change risks are priced in by certain G7 stock markets but not in smaller markets. Estimates of stock-market losses directly attributable to global temperature rises up to $2^0C$ above pre-industrial levels are also given.

Citation

Fry, J. (online). Projecting stock market impacts of climate change via rational bubble models. Risk analysis, https://doi.org/10.1111/risa.70078

• Journal Article Type: Article
• Acceptance Date: Jun 30, 2025
• Online Publication Date: Jul 10, 2025
• Deposit Date: Jul 4, 2025
• Publicly Available Date: Jul 11, 2027
• Journal: Risk Analysis: An international journal
• Print ISSN: 0272-4332
• Electronic ISSN: 1539-6924
• Publisher: John Wiley and Sons
• Peer Reviewed: Peer Reviewed
• DOI: https://doi.org/10.1111/risa.70078
• Keywords: Climate finance; Prediction; Speculative bubbles
• Public URL: https://hull-repository.worktribe.com/output/5283367
• Additional Information: Published in the CABS 4* journal Risk Analysis: An international journal