Research Insights from the EEA-ESEM Conference (Barcelona)

Research Insights from the EEA-ESEM Conference (Barcelona)

The MCRE team members attended the EEA-ESEM Annual Conference in Barcelona. This was a highly engaging and well-attended academic event that offered a wealth of practical insights. Below are the 4 key takeaways from the extended MCRE team:

1. What drives beliefs about climate risks? (Dongxiao Niu)

Recent research has documented how market participants react to climate-related events. For example, studies have found that investors are more likely to sell stocks with high carbon footprints during hot months, and mutual fund managers adjust their portfolio allocations following extreme heat events. However, what really piques our curiosity is the underlying psychology: What shapes these beliefs and actions? A compelling study by Matilde Faralli at Imperial College explores this issue by examining the impact of weather shocks on the climate beliefs of market analysts.

Faralli's study constructs an innovative dataset that pairs localized analysts with natural disasters occurring in the U.S. between 1999 and 2020. This research identifies the mechanisms—information, heuristic reasoning, or distraction—that influence how market participants respond to climate-related events.

The study presents intriguing findings. Analysts who experience weather shocks for the first time display greater pessimism and accuracy in their forecasts for firms that are geographically distant from the disaster event, compared to their untreated counterparts. This shift in perspective results in a 14% reduction in forecast bias and an 11% decrease in forecast errors. Notably, sectors that are more vulnerable to climate risks, such as agriculture, construction, and transportation, see analysts becoming increasingly pessimistic and accurate. The study also finds that high-performing analysts are particularly sensitive to firms that face high physical climate risks. Moreover, analysts become more accurate and pessimistic about companies with substantial institutional ownership and market capitalization. When looking at forecasts with varying time horizons (from 1 to 5 years), the changes in pessimism and accuracy are statistically significant for projections up to three years out and persist for up to six months post-event.

This study shines a spotlight on the nuanced psychological shifts among market analysts in response to weather shocks. By doing so, it adds another layer of understanding to how market participants integrate climate risks into their decision-making processes. These findings are particularly important for investors and businesses striving to comprehend how perceptions of climate risks influence market dynamics. As climate events become increasingly frequent and severe, gaining insights into the human elements of financial markets could be invaluable for shaping both policy and investment strategies aimed at mitigating the long-term impacts of climate change.

2. What drives household financial decision making? (Linde Kattenberg)

What drives household financial decision making, and how does this affect financial vulnerability? In the paper by Gulbrandsen of Norges Bank, he explores how peer effects play a role in consumption behavior and debt accumulation. He examines the case of lottery winners in Norway, and the effect that this could have on neighbors. Exploiting rich micro-level data on households, he looks at whether the neighbors acquire more debt, which would be a proxy for increased spending. The paper finds that neighbors of lottery winners increase their debt with 2.6% of the lottery price. Those with children, lower cash levels, and higher financial literacy even have significantly higher debt accumulation. Higher debt levels can make these households less resilient against income shocks. These findings provide novel insights on the long-term peer effects of household spending, and pose important policy considerations in protecting financially vulnerable households.

3. Takeaways from the keynote lecture (Bram Kroft)

In his keynote lecture, Prof. Sobel disentangled the ideas of deception into two components mathematically, namely, a change in beliefs and a damage function. Separating these concepts allows economists to think not only in terms of harmful and intentional deception but also by changing beliefs and information provision more generally.

Prof. Botticini elaborated on how insurance came to be in a historical setting, starting from 1340. Insurance was not needed in the past as private agents endogenously chose to perform their trade in safe or risky ways and bought protection of states, not among fellow merchants. However, since nautical advances and internal conflicts in Europe arose, human risks of piracy increased, and state insurance was infeasible due to the conflicts. This started the need for private insurance.

4. Adjustments of Local Labour Markets to the COVID-19 Crisis: the Role of Digitalisation and Working-from-Home (Minyi Hu)

Local labor markets have been hit unequally by the COVID-19 crisis, how is employment response to the pandemic affected by endowments in digital capital and working-from-home potential?

In a recent paper, Ben Yahmed (2022) research on this question on the German local labor markets, given the background of the German government's extended generosity and coverage of short-time work schemes during the pandemic(STW, which reduced the working hours to shield workers from job loss and firms from job match destruction employees.). Using monthly county-level employment data reports from the Federal Employment Agency, combined with industry-level data of capital stock in information and communication technologies (ICT) equipment from the EUKLEMS database, and occupational-level data on working-from-home frequency in 2018 from the last wave of the BIBB/BAuA Employment Survey, this paper found that local exposure to digital capital reduced short-time work usage by up to 4 percentage points and the effect lasted for about 8 months. Because working-from-home use will be increased with the exposure to digital capital. One channel of impact is working-from-home usage that grew with the exposure to digital capital: Working-from-home potential lowered short-time work rates, but only in local labor markets exposed to digital capital, and in the first four months of the pandemic when a strict lockdown was in place.

This paper provides some new insight into local labour markets’ responses to both short-time work and unemployment rates. Their findings suggest that digitalisation has improved the resilience of regions to the shock of the pandemic. Moreover, it seems that short-time work schemes have been successful in cushioning the potential negative employment effects of the crisis that were larger in regions with low digital capital endowments. Furthermore, regional differences in digitalisation have not led to persistent regional inequalities in employment.