Dominant global events and market response to climate risks

18 August 2025

Dr S. Sarah Zhang, B-CCaS Visiting Research Fellow, shares a new study examining how dominant global events influence financial markets’ responsiveness to climate-related risks. The research explores the role of media-driven investor attention in shaping volatility and contagion effects across U.S. and European markets.

A view of an American news studio from behind the cameras

The study uses text-based evidence from over 1 million news articles on how dominant media topics moderate the volatility effects of climate risks in U.S. and European stock markets.

When climate signals are drowned out by global headlines

As climate change intensifies, the financial system is increasingly exposed to both physical and transition risks. These risks, ranging from climate hazards to the regulatory implications of achieving a greener society, can have implications for asset prices, volatility, and cross-border spillovers.

However, the growing volume of climate-related information competes with other urgent global developments for investor attention. This study examines how competing news topics, particularly major non-climate events, dilute the financial impact of climate news, highlighting a critical challenge in the market’s implications of climate risk.

The challenge of limited investor attention

Investor attention is limited. When major events occur, such as wars or pandemics, investor focus becomes concentrated on these dominant issues, causing other topics to be overlooked. In this study, we investigate the implications of investors’ limited attention in the context of international market-implied volatility dynamics and spillovers tied to climate risks.

Measuring maximum attention shifts through news text-analysis

Using advanced textual analysis of over 1.3 million news articles, we construct a novel daily index of "maximum attention", identifying the leading news topic each day. These dominant themes are grouped into twelve categories: war, geopolitics, terrorism, disease, social issues, financial markets, economics, politics, international relations, energy, natural disasters, and climate. This classification enables us to systematically assess when and how climate-related news is sidelined by other high-salience topics.

Empirical evidence on how major global news events dilute climate risk impact

One of our primary objectives is to provide empirical evidence on how the effects of climate risk, both physical and transition-related, are moderated when investor attention shifts away from climate-related news, particularly during periods dominated by major non-climate events. To do so, we conduct a multivariate analysis of exogenous news shocks derived from our maximum attention measure, assessing their impact on daily implied volatility and volatility spillover indices across U.S. and European stock markets, while controlling for the various thematic categories.

Geopolitical shocks weaken the volatility effects of climate risks

Our approach allows us to pinpoint which theme—be it war, geopolitics, or others—acts as the main moderator of climate risk effects on financial markets. The underlying idea is that if climate risks are perceived as financial risks, their influence on financial markets should remain fairly consistent, regardless of concurrent global events. However, we find that the market impact of climate risks weakens when major non-climate events dominate media attention, particularly in the case of geopolitical shocks. Our results further highlight that global large-scale events such as wars, energy crises, and economic turmoil can dilute the financial relevance of climate risks, reducing their effect on market volatility and cross-border financial contagion.