Asymmetrical effects of climatic deterioration versus alleviation on cross-border capital inflows mediated by investor sentiments.

This study investigates the complex relationship between climate change and cross-border capital inflows by examining the asymmetric effects of climatic deterioration and alleviation on international capital flows. We incorporate both positive and negative investor sentiment to examine how climate change affects investor sentiment and, consequently, cross-border capital inflows. The empirical evidence indicates that both climatic deterioration and alleviation reduce cross-border capital inflows, with the paradoxical adverse impact of climatic alleviation being even more pronounced. Further analysis identifies different transmission mechanisms: climatic deterioration mainly suppresses capital inflows by weakening positive investor sentiment, while climatic alleviation simultaneously triggers negative sentiment and strengthens positive sentiment, ultimately resulting in a net decline in capital inflows. In addition, the influence of climate change on cross-border capital inflows appears stronger in developing countries, whereas the findings for developed economies are less conclusive. These results emphasize the complex channels through which climate dynamics shape global capital flows. Policymakers and investors should take into account the asymmetric effects of climate change and the mediating role of investor sentiment when designing strategies to mitigate climate-related financial risks.