Climate vulnerability and market volatility: Evidence from European firms

• Climate vulnerability is associated with higher firm-level volatility. • The effect holds within countries and industries over time. • The volatility response is stronger for financially constrained firms. • Financial constraints amplify exposure to climate vulnerability. • Climate risk manifests primarily as market uncertainty. This study examines the association between country-level climate vulnerability and firm-level stock return volatility in Europe. Using panel data on 490 listed firms across 17 European countries from 2013 to 2022, we find that firms located in more climate-vulnerable countries exhibit significantly higher market volatility. The results are robust across alternative measures, fixed-effects specifications, and endogeneity checks. We further show that this relationship is amplified for financially constrained firms when constraints are measured using the Kaplan–Zingales index. Overall, the findings suggest that climate vulnerability primarily manifests as heightened market uncertainty and that financial frictions play a key role in transmitting macro-level climate risk to firm-level market volatility.