Abstract
This study examines how climate transition risk (CTR) and climate physical risk (CPR) affect stock market performance across developed and emerging economies, by distinguishing between fossil fuel-dependent and non-fuel-dependent markets. Three specific objectives guide the analysis: to compare CTR and CPR effects across different energy structures, to evaluate how these risks operate over short- and long-term horizons, and to assess whether climate risk exposure varies across market conditions.
The analysis is based on climate risk indicators obtained from Economic Policy Uncertainty (EPU) database and stock market indices source from Refinitiv DataStream. The multi-method framework that was used combines wavelet coherence, the maximal overlap discrete wavelet transforms (MODWT)-based two-factor asset pricing, and multivariate quantile-on-quantile regression (MQQR). Wavelet coherence identifies time-frequency co-movements, the MODWT allows for horizon-specific climate betas for short-term (D1) and long-term (D8) components, and MQQR captures asymmetric and state-dependent sensitivities across return quantiles.
This study’s results indicate that climate risks are priced mainly in the short term, with CTR exerting stronger and more persistent effects than those of CPR. Developed, non-fuel-dependent markets display clearer long-term sensitivity to transition risk, especially after 2018, whereas emerging and fossil-dependent markets exhibit deeper and slower-recovering exposure to physical risk. Distributional findings further indicate that CTR is more influential during bullish periods, whereas CPR carries more weight.
Overall, climate risk pricing is asymmetric, horizon-dependent, and shaped by energy structure. Transition risk acts as a long-term drive in developed economics, whereas physical risk remains a pressing challenge for emerging and fossil fuel-dependent markets. These findings suggest that policymakers in fossil fuel-dependent economies should strengthen climate adaptation and risk management frameworks, while investors and regulators in developed markets should incorporate transition risk more explicitly into long-term asset pricing, portfolio allocation, and financial stability policies.