Quantile-frequency connectedness among climate change stocks: The roles of climate change attention and global uncertainties

Abstract

Concerns regarding climate change and the environment have heightened interest in climate-conscious investing, necessitating a deeper understanding of climate-friendly financial products. This study investigates climate change stock market connectedness and spillover effects, focusing on quantile-frequency dependency. The study utilizes a novel quantile-frequency connectedness with seven MSCI climate change market indices and daily data from January 2014 to December 2022. The empirical analysis reveals that climate change stocks are highly interconnected across various market conditions, including bearish and bullish periods. Spillover effects have amplified during increased stock market turbulence, regardless of market directions. Short-term spillover effects have a stronger impact than long-term effects, regardless of market conditions. Climate change stock markets in Japan and the Asia Pacific consistently experience net shocks, while the United States, Europe, Emerging Markets (EM), North America, and the European Economic and Monetary Union (EMU) exhibit variations based on market conditions and timeframes. The study identifies events including the 2015 Paris Agreement, the 2016 US withdrawal from the Paris Agreement, the COVID-19 pandemic, the 2021 US rejoining of the Paris Agreement, and the 2022 Russian-Ukraine War that have influenced the dynamic connectedness and spillover of climate change markets. The analysis also reveals that increased investor attention to climate change leads to higher interconnectedness among climate change stock markets across various market scenarios. Moreover, global financial stress, economic policy uncertainty, geopolitical risk, global carbon emission futures, oil market uncertainty, and stock market uncertainty significantly impact the interdependence of climate change markets. The findings have implications for portfolio managers, emphasizing the need for hedging techniques to mitigate risks in climate change market