Stock Market Reaction to Extreme Climate Events : Evidence from Emerging Economies
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This thesis examines the short-term stock market reaction to extreme climate events in an emerging market context, with a specific focus on India. The study explores the question of whether extreme climate events create abnormal stock market returns, as well as whether the response to these extreme climate events is more related to the nature of the event or to other market conditions. This research is driven by the growing economic and financial importance of climate-related risks and the scarcity of empirical studies on short-term market reactions to physical climate shocks in emerging economies.
The empirical analysis is based on 25 extreme climate events that occurred in India during the period 2015–2025. Climate event data are taken from the EM-DAT international disaster database, and financial market data are sourced from the NIFTY 50 index. This study utilizes the method of event study to quantify the cumulative abnormal returns (CARs) around the event dates. The constant mean return model is the main benchmark model, and an autoregressive AR (1) specification is used for the robustness analysis. Furthermore, a cross-sectional regression analysis is performed to test whether the abnormal returns are explained by event severity, event type and prevailing market conditions.
The results suggest that the abnormal stock returns in the immediate short-term event window (-1, +1) are statistically significantly related to extreme climate events. However, the significance disappears in longer event windows, suggesting that market reactions are temporary and short-lived. The regression results also indicate that event-specific variables, such as event type and abnormal return, do not systematically account for the differences in abnormal returns at the aggregate market level. Instead, broader market conditions, including market volatility and pre-event market trends, appear to play a more important role in shaping investor reactions.
The results contribute to the climate finance literature by providing evidence from an emerging market setting and by highlighting the importance of market context in understanding financial market responses to climate-related shocks. The study indicates that the market reactions of the aggregates to extreme climate events depend not only on the intrinsic characteristics of the event but also on the market and financial conditions.