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Spillover effects of climate transition risk and financial sectors: New evidence from China

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  • Shiyuan Li
  • Xin Li

Abstract

This paper employs the connectedness approach based on a time‐varying parameter vector autoregressive model (TVP‐VAR) to examine the overall spillover effects, directional spillover effects and pairwise spillover effects of climate transition risk (CTR) and financial sectors of China in both the time domain and frequency domain. The main findings are as follows: Firstly, spillover effects from CTR are significant, impacting not only individual sectors but also amplifying across the entire system. Secondly, while the influence of CTR on financial sectors is lower compared to interconnections among financial sectors, it remains considerable. Thirdly, in the short‐term, risks transmit from CTR to financial sectors, while in the long‐term, the direction reverses. Fourthly, there were significant fluctuations in spillover effects among CTR and financial sectors from 2003 to 2008, indicating increased risk under extreme conditions. The findings of this study contribute to the understanding of potential risks in the financial system by regulatory authorities, facilitating the adoption of appropriate regulatory measures to maintain market stability. Moreover, it provides valuable insights for investors to better accurately assess risks and returns.

Suggested Citation

  • Shiyuan Li & Xin Li, 2025. "Spillover effects of climate transition risk and financial sectors: New evidence from China," Australian Economic Papers, Wiley Blackwell, vol. 64(1), pages 71-90, March.
    • Handle: RePEc:bla:ausecp:v:64:y:2025:i:1:p:71-90
    DOI: 10.1111/1467-8454.12374
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    1. Minye Rao & Guannan Chen & Zhenhuang Yang & Hok Kun Wan & Huangxin Chen, 2025. "Does Climate Risk Impacts Government Environmental Concern in China? Insights from the Volatility of Spatial Spillover Effects," SAGE Open, , vol. 15(4), pages 21582440251, November.

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