Carbon VIX , Climate Risk and Financial Stability New Evidence From Developing Countries

ABSTRACT This study investigates the effects of the carbon VIX and climate risk on financial stability through the banking Z ‐score in developing economies. Using the Dynamic Panel Threshold Model of 106 developing countries from 2012 to 2022, the results reveal that both carbon VIX and climate risk exert a significant negative influence on banking stability, indicating that rising carbon market volatility and climate‐related disruptions increase systemic risk and weaken financial resilience. The estimated critical value of CVIX, as evidenced by the sample split into two regimes below and above the volatility threshold, suggests that environmental and financial risks exert a regime‐dependent effect on Z ‐scores. Higher CVIX levels increase uncertainty in carbon markets, which can reduce bank profitability and capital buffers, lowering the Z ‐score and weakening overall banking stability.