Typhoons Shake Stock Markets: Study Traces How Storm Risk Flows From Factories to Banks

When a typhoon makes landfall, the damage is measured first in shattered roofs, flooded factories, and disrupted power lines. But a new study suggests the disruption does not stop at the coastline. It travels, invisibly and rapidly, through the wiring of the financial system itself. Research published in Humanities and Social Sciences Communications finds that typhoon disasters significantly increase the stock price volatility of affected companies in China, and that this turbulence does not stay confined to the firms directly in the storm’s path. Instead, it spills over from non-financial enterprises into the financial sector, offering some of the most granular evidence yet that extreme weather can seed systemic risk across markets.

The study, conducted by Can Wang of Hubei University of Economics and colleagues at Hubei Minzu University, Postal Savings Bank of China, China Export & Credit Insurance Corporation, and Enshi Polytechnic, draws on comprehensive data from the Chinese A-share market spanning 2008 to 2024. That sixteen-year window captures a period during which typhoons repeatedly struck China’s densely populated and economically vital eastern and southern coastlines, giving the researchers a rich natural laboratory in which to observe how capital markets absorb and transmit physical climate shocks.

To isolate the effect of typhoons from the ordinary noise of market life, the team employed a two-way fixed effects difference-in-differences model, a workhorse of modern empirical economics. The logic is straightforward: compare firms that were hit by a typhoon with comparable firms that were not, before and after the event, while controlling for unchanging characteristics of each firm and for economy-wide shocks that affect everyone at once. If the exposed firms show a sharp rise in stock volatility relative to their unexposed peers, the typhoon itself is the most plausible explanation. The researchers found exactly that pattern: typhoon disasters significantly exacerbated the stock volatility of affected enterprises.

But measuring volatility spillovers between sectors requires heavier statistical machinery. For that task, the authors turned to a framework known as VaR-BEKK-MVGARCH-DUMMY-T. The multivariate GARCH component models how the variance of returns in different sectors evolves over time and, crucially, how shocks to one sector’s volatility feed into another’s. The BEKK structure allows the researchers to estimate the direction of these cross-market transmissions rather than merely noting that two sectors move together. The value-at-risk layer gauges tail risk, the potential for extreme losses, while dummy variables flag the typhoon episodes themselves, and the T designation accommodates the fat-tailed distributions that characterize real financial returns. Together, these tools let the team trace not just whether volatility rose, but where it originated and where it flowed.

The answer was strikingly asymmetric. The study confirms a unidirectional volatility spillover effect running from the non-financial sector to the financial sector during extreme weather events. In other words, when typhoons whipsaw the stock prices of manufacturing, utility, and other real-economy firms, that turbulence propagates into banks, insurers, and other financial institutions, not the other way around. This directionality matters. It suggests that during climate shocks, the financial system behaves less like an independent source of instability and more like a conduit, absorbing and amplifying distress that originates in the productive economy.

The finding is grounded in stakeholder theory, the idea that a firm’s value and risk are shaped by its web of relationships with suppliers, customers, employees, lenders, and investors. A typhoon disrupts those relationships on multiple fronts simultaneously. Factories shut down, shipments are delayed, workers cannot reach their jobs, and customers face shortages. Each of these frictions degrades expected cash flows, and because stock prices embody expectations about those cash flows, the uncertainty surrounding them translates directly into wider price swings. The researchers describe this as a decline in supply chain resilience among non-financial enterprises, one of two distinct pathways through which typhoons amplify volatility risk across industries.

The second pathway operates on the psychology of markets. Typhoons, the study finds, destabilize investor confidence within the financial system by exacerbating widespread uncertainty. Extreme weather events are inherently unpredictable in their scope and consequences, and that unpredictability infects the expectations of traders, fund managers, and analysts. When investors cannot easily assess how badly a storm has damaged a firm’s assets or how long its operations will be impaired, they demand a larger premium for holding the stock, buying and selling more aggressively as information trickles in. The result is heightened volatility not only in directly affected firms but across the financial institutions that hold their debt, underwrite their insurance, and extend their credit.

This dual mechanism, physical disruption of supply chains on one side and erosion of investor confidence on the other, provides what the authors call robust micro-level evidence for cross-market systemic risk contagion triggered by extreme climate events. Systemic risk is usually discussed in the language of banking crises and interbank lending, but this research reframes it in climate terms. A single typhoon, by damaging the real economy, can set off a chain of financial reactions that reaches institutions hundreds or thousands of kilometers from the landfall point. The heterogeneity the study emphasizes, the distinction between financial and non-financial enterprises, is essential to understanding that chain, because the two sectors respond to and transmit climate risk in fundamentally different ways.

The implications extend well beyond China. As climate change intensifies, extreme weather events are projected to become more frequent and more severe, and financial regulators around the world are increasingly demanding that banks and insurers stress-test their portfolios against physical climate risks. This study suggests that such stress tests should model not only the direct exposure of financial institutions to storms, but also their indirect exposure through the real-economy firms they finance. A bank whose loan book is concentrated in typhoon-prone manufacturing regions may face volatility-driven losses even if none of its own branches ever loses power. Similarly, portfolio managers seeking to hedge climate risk cannot treat financial and non-financial holdings as independent, because the study’s evidence shows volatility flowing in one direction between them during disasters.

The research also deepens the theoretical foundations of the rapidly growing field of climate finance, which seeks to understand how climate risk is priced, transmitted, and managed in markets. By documenting heterogeneous industry risk transmission mechanisms with a rigorous identification strategy and a sophisticated volatility model, the study moves the field beyond simple correlations between weather and returns. It demonstrates that the architecture of the economy, who supplies whom, who lends to whom, and who insures whom, determines how a physical shock becomes a financial one. As storms grow stronger and coastlines ever more crowded with industry, understanding that architecture may become one of the most important tasks in modern finance. The study’s authors received support from the Youth Fund Project of Hubei University of Economics and the National Statistical Science Research Project, and the work was published open access, making the detailed evidence available to researchers and regulators worldwide.

Subject of Research: The spillover effects and mechanisms of typhoon disasters on stock volatility in Chinese financial and non-financial enterprises

Article Title: The spillover effects and mechanisms of typhoon disasters on stock volatility: considering the heterogeneity of financial enterprises and non-financial enterprises

Article References: The spillover effects and mechanisms of typhoon disasters on stock volatility: considering the heterogeneity of financial enterprises and non-financial enterprises. (n.d.). https://doi.org/10.1038/s41599-026-09394-z

Image Credits: AI Generated

DOI: 10.1038/s41599-026-09394-z

Keywords: typhoons, stock volatility, climate finance, spillover effects, financial sector, non-financial enterprises, supply chain resilience, investor confidence, systemic risk, difference-in-differences, multivariate GARCH, Chinese A-share market