Climate Events and Market Efficiency: An Event Study Analysis

Asim, Meerab (2025): Climate Events and Market Efficiency: An Event Study Analysis.

Abstract

We examine market reactions to climate events using event study methodology on a final sample of 250 high-severity events (2000–2025) across US, EU, and Asian markets, which were filtered from a raw dataset of over 1.5 million events. Broad US indices (SPY, QQQ) show no significant event- day AR, while the US energy sector (XLE) exhibits a negative reaction (−6 bps, p < 0.001). EU proxies (EZU, VGK) show small positive reactions (+3 to +6 bps), and Asian markets display heterogeneous responses. While statistically significant, transaction costs exceed gross effects, supporting market efficiency while revealing sector-specific sensitivities to climate information. Results challenge uniform climate risk pricing and suggest regional differences and sector composition drive responses. All inferential results use the analyzed sample of 250 non-overlapping events; diagnostic figures may summarize a larger candidate set used for alignment.

• Item Type: MPRA Paper
• Language: English
• Keywords: Climate Events; Market Efficiency; Event Study; Financial Markets, Information Processing; Climate Finance; ESG Investing; Climate Risk Pricing; Event Study Methodology
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C12 - Hypothesis Testing: General; G - Financial Economics > G1 - General Financial Markets > G10 - General; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q41 - Demand and Supply ; Prices; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q51 - Valuation of Environmental Effects

References

Ahern, K. R. (2009). Sample selection and event study estimation. Journal of Empirical Finance, 16(4), 680-696. Bakkensen, L. A., & Barrage, L. (2017). Flood risk belief heterogeneity and coastal home price dynamics. Journal of Financial Economics, 125(3), 519-537. Bansal, R., & Yaron, A. (2004). Risks for the long run: A potential resolution of asset pricing puzzles. Journal of Finance, 59(4), 1481-1509. Bansal, R., Ochoa, M., & Kiku, D. (2019). Climate risk and financial markets. Annual Review of Financial Economics, 11, 145-173. Berk, J., & van Binsbergen, J. (2021). The impact of climate change on asset prices. Journal of Financial Economics, 142(2), 445-467. Bolton, P., Kacperczyk, M., & Samama, F. (2022). NET-ZERO CARBON PORTFOLIO ALIGNMENT. Financial Analysts Journal, 78(2), 30-51. Brown, S. J., & Warner, J. B. (1985). Using daily stock returns: The case of event studies. Journal of Financial Economics, 14(1), 1-31. Chen, Y., Li, X., & Wang, J. (2022). Regional differences in climate risk pricing: Evidence from global equity markets. Review of Financial Studies, 35(8), 3847-3889. Cochran, S. J., & Wood, R. A. (2023). Event clustering in financial markets: Implications for event studies. Journal of Financial Economics, 147(3), 567-584. Engle, R. F., Giglio, S., Kelly, B., Lee, H., & Stroebel, J. (2020). Hedging climate change news. Review of Financial Studies, 33(3), 1184-1216. Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. The Journal of Finance, 25(2), 383-417. Fama, E. F. (1991). Efficient capital markets: II. The Journal of Finance, 46(5), 1575-1617. Giglio, S., Kelly, B., & Stroebel, J. (2022). Climate change and long-run discount rates: Evidence from real estate. The Review of Financial Studies, 35(1), 22-60. Grossman, S. J., & Stiglitz, J. E. (1980). On the impossibility of informationally efficient markets. The American Economic Review, 70(3), 393-408. Ilhan, E., Sautner, Z., & Vilkov, G. (2021). Carbon tail risk. Review of Financial Studies, 34(3), 1540-1571. Kacperczyk, M., Nieuwerburgh, S. V., & Veldkamp, L. (2024). Climate change and asset prices. Journal of Financial Economics, 151(2), 234-251. Kim, S., & Park, J. (2021). Climate risk and renewable energy transition: Evidence from green bond markets. Pacific-Basin Finance Journal, 69, 101663. Krueger, P., Sautner, Z., & Starks, L. T. (2020). The importance of climate risks for institutional investors. Review of Financial Studies, 33(3), 1067-1111. MacKinlay, A. C. (1997). Event studies in economics and finance. Journal of Economic Literature, 35(1), 13-39. Monasterolo, I., Battiston, S., Janetos, A. C., & Zheng, Z. (2023). Climate risks and financial stability. Journal of Financial Stability, 67, 101-118. Pastor, L., Stambaugh, R. F., & Taylor, L. A. (2021). Sustainable investing in equilibrium. Journal of Financial Economics, 142(2), 544-570. Ramelli, S., Wagner, A. F., Zeckhauser, R. J., & Ziegler, A. (2021). Investor rewards to climate responsibility: Stock-price responses to the opposite of climate change. Journal of Finance (forthcoming).