We offer global evidence on the macroeconomic effects of climate change for a panel of 22 countries classified by economic groupings. We show that: globally, climate change is inflationary; the negative impacts of climate change on the exchange rate markets is only evident in emerging economies; stock markets could hedge natural climate risks but fail to hedge climate risks due to policy uncertainty.

During periods of economic uncertainty, investors often display irrational behaviour that amplifies market volatility. To examine the validity of this growing assertion, this study investigated the Johannesburg Stock Exchange (JSE) from January 2000 to end of December 2023, focusing on how investor sentiment affects market volatility, with consideration of differing effects based on firm size. Utilizing a GARCH-MIDAS framework which allows for the decomposition of volatility into short-run and long-run components, the research examined whether investor sentiment significantly influences stock market volatility in South Africa. The analysis revealed that small- and mid-cap indices are particularly sensitive to shifts in investor sentiment in the short run. In contrast, the long-run volatility of mid-cap stocks is significantly influenced by macroeconomic factors, particularly inflation and exchange rate fluctuations. The findings also demonstrate that firm size has a significant impact on volatility dynamics, highlighting the diverse ways that small-, mid-, and large-cap stocks react to economic and behavioural factors. These results show that the JSE’s volatility patterns are shaped by the size-dependent roles of macroeconomic data and investor sentiment, and contributes to literature by providing novel evidence from a major emerging market, highlighting the importance of firm size in understanding the temporal pattern of volatility and its determinants.

Purpose: Given the systemic nature of climate change, there are many interdependencies between its primary components and feedback loops, emphasising the need to simultaneously consider the stock market implications of physical and transitional climate-related risks. More importantly, carbon emissions are expected to be reduced through various transition pathways. However, transitional climate risks have been validated as capable of predicting stock market behaviour, hence the motivation for the role of technology shocks.Design/methodology/approach: We use a GARCH-MIDAS model to examine the relationship between climate change and stock return volatility since it enables data analysis at various frequencies within the same framework. We employ a novel dataset to track technology shocks, and the study spans decades of data from 1880 to 2018.Findings: We find that the relationship between climate change and stock return volatility is episodic and varies with different degrees of intensity of high-temperature anomalies and technology shocks. Our results suggest that policy actions should include investing in climate technologies to reduce greenhouse gas emissions and encouraging investment in eco-friendly assets.Originality/value: There has been little or no consideration for the probable complementary effects of physical and transition climate-related risks on stock markets. Hence, the novelty in the context of this study is the hypothesis that transitional risks, if explored from the point of view of technological innovations, can moderate the stock market’s vulnerability to physical climate risks.