Nonlinear interaction of climate risk and stock market

This paper investigates both the direct and indirect pathways through which climate change risks influence the fossil energy stock market in China, focusing on the mediating effect of investor attention and the moderation effect of the crude oil market. Utilizing China’s daily climate risk data and energy stock return data from September 4, 2017, to June 30, 2022, we employ the partial linear function coefficient model, zero-inflated negative binomial regression, and the Bootstrap technique to unravel these complex relationships. Our analysis reveals pivotal findings: (1) Climate transition risk has a U-shaped nonlinear direct effect on fossil energy stock returns, with a critical inflection point identified at 0.3364. This risk also positively mediates the return rate by shaping investor attention. Notably, exceeding a risk threshold of 0.3 intensifies the adverse impact of oil price volatility on returns. (2) Climate physical risk does not exert a discernible direct effect or mediation on the return rate of fossil energy stocks. These insights offer a comprehensive perspective on the complex interplay between climate change risk and China’s fossil energy stock market, shedding light on the nonlinear dynamics that govern these relationships. From a practical perspective, these findings underscore the need for policymakers to design risk mitigation strategies tailored to transition risks, while investors should remain vigilant to oil price volatility when climate risk exceeds critical thresholds. • Identified a critical threshold at 0.3364 in CTR’s impact on fossil energy stocks. • Demonstrated CTR’s intensified negative impact on returns beyond a 0.3 risk level. • Showed CTR’s positive mediating effect on investor attention. • Provided a detailed nonlinear analysis of CTR and CPR’s influence on stock returns. • Revealed unexplored roles of CTR and CPR in fossil energy stock dynamics.