The impact of climate policy on the risk contagion in China’s stock markets

ABSTRACT

This paper analyses the impact of climate policy on the risk transmissions in China’s stock markets from sectoral perspectives. By constructing a (Generalized Autoregressive Conditional Heteroskedasticity-Mixed Data Sampling) GARCH-MIDAS model and conducting quantile regression tests, we find that climate policy exacerbates the tail risk spillover effect within the stock markets, while the sectoral effects would present heterogeneity. Both the spillovers and the systemic importance of finance and energy-intensive subsectors are susceptible to climate policy shocks. As for agriculture, its cross-sector spillovers are considerably intensified by climate policy, though its systemic importance is only enhanced by the policy in the long-run.

KEYWORDS:

• Climate policy
• stock market
• tail risk spillover
• GARCH-MIDAS model
• network analysis

JEL CLASSIFICATION:

• C32
• G10
• G18
• D85

Disclosure statement

No potential conflict of interest was reported by the author(s).

Supplementary material

Supplemental data for this article can be accessed online at https://doi.org/10.1080/13504851.2024.2334926

Notes

¹ See https://www.wind.com.cn/.

² The classification can be found in Table A1 in Appendix A, and the descriptive statistics of the returns are displayed by Table B1 in Appendix B.

³ The data are available at http://www.cnefn.com/main.

⁴ The Pagerank scores reflect the connectedness between one node and another, while considering the influence ability of its neighbours (W. Zhang et al. 2020).

⁵ Each bubble in the chart corresponds to the impact of climate policies on each pairwise spillovers, specifically, the colour of bubble represents the value of estimated $\mathit{\theta }$, and the size represents the significance level. The bubbles in rows represent the impact on in-strengths of the corresponding sectors, while those in columns represent that on out-strength of the corresponding sectors.

⁶ There is no bubble in the diagonal line corresponding to agriculture sector, because only one subsector exists in this industry; therefore, no within-sector contagion can be calculated.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [72348003, 72022020, 71974181].