Abstract
We examine dynamic co-movements and the dependence structure between the news-based climate policy uncertainty index and distance to default as well as market returns of the top US banks that finance fossil-fuel companies. We utilize Wavelet Coherence approach to examine this relationship in time-frequency domain for the period August 1999 to June 2023. The results suggest that both Distance-to-Default and the returns of US banks do not exhibit strong co-movement and long-term interdependence with climate-related risks. Although there are a few short-term episodes of heightened interlinkages, such trends are not persistent in the long run. The episodes of soaring interdependencies coincide with significant climate action events. The findings imply that since major US banks financing the fossil-fuel industry hold diversified financing portfolios, their stability and market performance is not substantially affected by the performance and stability of fossil fuel companies in the long run. The results carry important implications for investors and policy makers related to environmental regulations and policy effectiveness, financial stability, risk management and asset allocation.
| Original language | English |
|---|---|
| Article number | 104276 |
| Journal | International Review of Economics and Finance |
| Volume | 102 |
| DOIs | |
| Publication status | Published - Sept 2025 |
UN SDGs
This output contributes to the following UN Sustainable Development Goals (SDGs)
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SDG 13 Climate Action
Keywords
- Climate policy uncertainty
- Distance to default
- Energy
- Fossil-fuel
- Risk
ASJC Scopus subject areas
- Finance
- Economics and Econometrics
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