Extreme Climate And Natural Disaster Risk In Financial Markets: A CoES Approach

Abstract Book of the 11th International Conference on Management, Economics and Finance

Year: 2026

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Extreme Climate And Natural Disaster Risk In Financial Markets: A CoES Approach

Prof Dr. Lidia Sanchis-Marco, Laura García-Jorcano

ABSTRACT:

This study investigates how extreme climate conditions and natural disasters (EC&ND) affect market and systemic risk across major S&P 500 sectors. We extend the conditional autoregressive expected shortfall (CARES) model and develop a semiparametric conditional expected shortfall (CoES) framework that directly incorporates EC&ND variables into sectoral tail-risk and systemic-risk estimation, overcoming limitations of VaR- and CoVaR-based approaches. Our methodology also introduces two novel metrics, the disaster market risk ratio (DMRR) and the disaster systemic risk ratio (DSRR), which quantify the marginal contribution of disaster-related factors to sector losses and systemic transmission. Results show that EC&ND variables significantly amplify market and systemic risk, particularly in the energy, insurance, agriculture, and real estate sectors. Extreme heat and disaster frequency are key drivers of tail losses and systemic spillovers. Backtesting confirms that extended ES and CoES models substantially improve forecasting accuracy. By revealing how climate-related shocks reshape risk interdependencies, the study offers actionable insights for financial regulators and macroprudential authorities seeking to integrate environmental risks into stress testing, capital requirements, and systemic risk surveillance.

Keywords: Natural Disasters; Climate Change; Quantile Regressions; CARE Models; Coes Measure