Physical Climate Risk and Volatility of Financial Markets: The Moderating Role of Moon Days

ABSTRACT We examine the moderating role of moon days on the relationship between physical climate risk and the volatility of financial market returns. Moreover, we investigated the isolated impact of both full moon days and the daily physical climate risk index on return volatility. We adopted GARCH‐family models across a comprehensive set of asset indices, including cryptocurrencies, conventional and Islamic stocks and bonds, as well as listed private equity, from January 2016 to June 2025. The present study shows that full moon days have a significant impact on how physical climate risk affects asset volatility. Our findings confirm that physical climate risk has diverse effects. We found that the interaction with full moon days often leads to an amplified increase in volatility in assets like cryptocurrencies and some regional conventional bonds (S&P China Bond Index and S&P Japan Bond Index), revealing that lunar phases can exacerbate the market's response to climate‐related shocks. Unexpectedly, Islamic equity indices (unlike all other indices) exhibit lower return volatility on full moon days when interacting with physical climate risk, indicating a potential “flight to Shariah” by investors. Financial institutions and policymakers may factor these cyclicals and behavioral elements into their trading algorithms, risk assessments, and regulatory frameworks to enhance market stability against climate change. We are the first to explore the impact of moon days on the relationship between physical climate risk and financial market volatility.