Topics in climate change risk

In this Thesis, we analyze how climate risk impacts economic players and its consequences on the financial markets. Essentially, literature unravels two main channels through which climate change poses risks to the status quo, namely physical and transitional risk, that we cover in three works. Firstly, the call for a global shift to a net-zero economy implicitly devalues assets that contribute to global warming that regulators are forcing to dismiss. On the other hand, abnormal changes in the temperatures as well as weather-related events challenge the environmental equilibrium and could directly affect operations as well as profitability. We start the analysis with the physical component, by presenting a statistical measure that generally represents shocks to the distribution of temperature anomalies. We oppose this statistic to classical physical measures and assess that it is the driver of the electricity consumption, in the weather derivatives market, and in the cross-section of equity returns. We find two transmission channels, namely investor attention, and firm operations. We then analyze the transition risk component, by associating a regulatory horizon characterization to fixed income valuation. We disentangle a risk driver for corporate bond overperformance that is tight to change in credit riskiness. After controlling a statistical learning algorithm to forecast excess returns, we include carbon emission metrics without clear evidence. Finally, we analyze the effects of change in carbon emission on a regulated market such as the EU ETS by selecting utility sector corporate bond and, after controlling for the possible risk factor, we document how a firm’s carbon profile differently affects the term structure of credit riskiness.