Transboundary Linkages of Climate Change Risks: An Empirical Analysis of stock markets in the Middle East and North Africa region

While increasing attention has been given to the financial implications of climate change, the mechanisms through which climate-related financial risks are transmitted across borders remain insufficiently explored. This paper examines the influence of climate risk on equity market returns, emphasizing the degree of cross-border risk spillovers. The analysis used a two-way fixed-effects regression model on panel data from 12 Middle East and North Africa (MENA) nations spanning 2012 to 2021. The empirical findings indicate that heightened climate risk levels correlate with increasing co-movement in equity market returns across countries, signifying bilateral risk transfer. This effect is more prominent in country pairs with analogous economic structures or more mutual dependency on imports. Moreover, the findings indicate that enhanced climate performance — assessed by a nation's ability to execute effective climate mitigation strategies — mitigates the extent of cross-border financial contagion, especially when both nations exhibit robust performance. These findings demonstrate the significance of incorporating climate risk factors into financial modeling and anxiety the essential role of international collaboration—particularly in the MENA region—in reducing the adverse effects of climate risks on financial market stability, even in nations with relatively little domestic exposure.