Climate change and sectoral stock price dynamics: Empirical evidence from an ARDL modeling approach

• Sectoral stock indices react differently to temperature in the short and long term. • Temperature shocks lower stock prices in the short run across key industries. • Long-run temperature rise supports growth in energy and capital goods sectors. • Climate effects outweigh macro factors in driving sectoral stock volatility. • Findings suggest investing in climate-resilient sectors boosts returns. Climate finance linkages in emerging markets remain insufficiently understood at the sectoral level, where exposures to physical climate risk and macroeconomic shocks can differ markedly across industries. This paper examines whether temperature stress alongside industrial activity, inflation, and lending rates systematically affects India’s sectoral equity indices in both the short and long run. Using quarterly data for 2004Q1-2023Q4 and an Autoregressive Distributed Lag (ARDL) framework with bounds testing, we find robust cointegration for all eight BSE sectoral indices. In the short run, temperature changes exert a uniformly negative and highly significant effect across sectors (ranging from -3.19 to -9.29), indicating immediate valuation losses following within-quarter warming. In the long run, temperature has a positive impact across all sectors (ranging from 8.67 to 26.65), consistent with pricing that reflects adaptation investment, energy transition expectations, and sectoral reallocation over time. The error-correction terms (ECTs) are negative and significant, implying meaningful quarterly convergence toward equilibrium. Macroeconomic controls remain important but exhibit sector-specific transmission. The study shows that temperature stress is a priced risk in the Indian sectoral equities, with adverse short-run impacts but positive long-run revaluation, offering implications for climate-aware portfolio allocation and sector-targeted transition policy in emerging markets.