Weathering the Storm

Abstract

This study examines the financial consequences of extreme weather using data from the Australian Actuaries Climate Index (AACI), which tracks temperature, rainfall, drought, wind, and sea level. Employing both a simple average of AACI components and Principal Component Analysis (PCA), we use a vector autoregression (VAR) model to identify financial market disruptions, including inflationary pressures from food and energy prices, declines in interest rates, and rising unemployment. Energy consumption spikes highlight asset allocation challenges, while Core CPI experiences significant volatility. These findings emphasize the role of extreme weather shocks in shaping inflation dynamics and broader financial stability.