ASYMMETRIC PANEL CAUSALITY TEST WITH AN APPLICATION TO THE IMPACT OF CLIMATE CHANGE ON FINANCIAL RISK

Year 2019, Volume: 6 Issue: 1, 1 - 10, 31.01.2019

Ünzüle Kurt , Feyza Balan

https://doi.org/10.15637/jlecon.6.001

Abstract

Climate change which caused to dramatic economic impact is a key issue for the world in the 21st century. Using data for Portugal, Ireland, Italy and Spain (PIIGS) countries over the years 1990-2009, this study investigates the causal relationship from climate change to financial risk/stability via Hatemi-J asymmetric causality test that separates positive and negative shocks in analysis. As a result of this study, both positive and negative shocks existed for Ireland, causality from climate change to financial risk emerged for Spain in only negative shocks. In addition, the results showed that a positive shock in climate change cause a negative shock in financial stability. In the cases of Greece and Portugal none of the causal relationships cannot be proved.

Keywords

asymmetric panel causality test, climate change, financial risk

References

• ABI, the Association of British Insurers (2005). Financial Risks of Climate Change, June 2005, Summary Report, (15.12.2015)
• https://www.cigionline.org/sites/default/files/policy_brief_no.62.pdf>
• BIS, Bank for International Settlements, (2001). Group of Ten-Consolidation in Financial Sector, (15.12.2015), <://www.bis.org/publ/gten05ch3.pdf >
• BREUSCH, T. S. and PAGAN, A. R. (1980). The Lagrange Multiplier Test and its Applications to Model Specification in Econometrics, The Review of Economic Studies, Vol. 47, No. 1, Econometrics Issue, pp. 239-253.
• CHENET, Hugues., JAKOB Thomä, DIDIER Janci. (2015). Financial Risk and the Transition to a Low Carbon Economy Towards A Carbon Stress testing Framework, 2° Investing Initiative Working Paper July 2015.
• CHOI, I. (2001). Unit root tests for panel data. Journal of International Money and Finance 20: 249–272.
• DAILEY, Peter., Matt Huddleston, Simon Brown and Dennis Fasking (2009). The Financial Risks of Climate Change, ABI Research Paper No 19, 2009.
• Food and Agriculture Organization of the United Nations, FAOSTAT, (2014).
• GRANGEr, Clive W.J., Yoon, Gawon. (2002). "Hidden Cointegration," Royal Economic Society Annual Conference 2002 92, Royal Economic Society.
• HATEMI-J, A. (2011). Asymmetric Panel Causality Tests with an Application to the Impact of Fiscal Policy on Economic Performance in Scandinavia. MPRA Paper No 55527.Munich: University Library of Munich.
• HATEMI-J, A. (2012). Asymmetric Causality Tests with an Application. Empirical Economics, 43, 447–456.
• HATEMI-J, A., Rangan Gupta, Axel Kasongo, Thabo Mboweni, Ndivhuho Netshitenzhe. (2014). Are there Asymmetric Causal Relationships between Tourism and Economic Growth in a Panel of G-7 Countries?, University of Pretoria, Department of Economics Working Paper Series, Working Paper: 2014-76.
• IM, K.S., PESARAN, M. H. and SHIN,Y., (2003). Testing for Unit Roots in Heterogeneous Panels. Journal of Econometrics, 115, pp.53-74.
• MADDALA, G. S. & WU, Shaowen. (1999). A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test. Oxford Bulletin of Economics and Statistics, Special Issue, 0305–9049: 631–652.
• PESARAN, M.H. (2006), Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure”, Econometrica, 74(4), 967-1012.
• PESARAN MH, Yamagata T (2008). “Testing slope homogeneity in large panels”. Journal of Econometrics 142: 50–93.
• PRS Group (2005). About ICRG: The Political Risk Rating, <http://www.icrgonline.com/page.aspx?page=icrgmethods>.
• STENEK, Vladimir, Jean Christophe Amado, Richenda Connell. (2009). Climate Risk and Financial Institutions, Challenges and Opportunities, International Finance Corporation, World Bank.
• THISTLETHWAITE, J. (2015). The Challenges of Counting Climate Change Risks in Financial Markets. The Centre for International Governance Innovation Policy Brief, No. 62, June 2015.