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Policy intervention and stock market stability risks: Evidence from carbon emission trading policy on energy firms in China

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  • Chen, Chuanglian
  • Ye, Cheng
  • Wang, Haonan
  • Yao, Shujie

Abstract

Stock market volatility, crucial for financial risk management and investment decisions, is significantly influenced by carbon emissions trading policies. This study applies the GARCH-MIDAS-EPU model to estimate the long- and short-term volatilities of 30 A-share energy firms and employs the HD-TVP-VAR model to assess contagion effects. Using carbon emissions trading policy as a quasi-natural experiment, it examines the policy’s impact on firm-level volatility and net spillovers. The results indicate that short-term volatility exhibits strong clustering, while long-term volatility follows a non-linear adjustment path with regime shifts. Increased short-term volatility spillovers amplify contagion risks, whereas persistent long-term spillovers suggest sustained investor focus. Carbon emissions trading heightens firm-level volatility and influences short-term spillover dynamics but has an insignificant effect on the long-term net spillover index. The policy’s impact varies by firm characteristics, with centrally state-owned firms facing fewer financial constraints benefiting most from incentives.

Suggested Citation

  • Chen, Chuanglian & Ye, Cheng & Wang, Haonan & Yao, Shujie, 2025. "Policy intervention and stock market stability risks: Evidence from carbon emission trading policy on energy firms in China," Journal of Asian Economics, Elsevier, vol. 98(C).
    • Handle: RePEc:eee:asieco:v:98:y:2025:i:c:s1049007825000582
    DOI: 10.1016/j.asieco.2025.101934
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