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Financial markets and environmental risks: unveiling the impact of climate uncertainty

Author

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  • Ali, Shoaib
  • Xiaoyang, Xu
  • Alharbi, Samar S.
  • Rasheed, Muhammad Shahid

Abstract

This paper examines the co-movement between Chinese climate policy uncertainty (CPU) and Twitter-based Chinese climate uncertainty (CU) on the eleven sectors of the Chinese equity market, utilizing monthly data from December 2011 to January 2023. To this end, we employ a wavelet-based analysis, which enables the investigation of bivariate relationships in time and frequency domains. The wavelet coherence plot indicates that the influence of CPU on equity sectors is relatively limited and largely insignificant. We also observe a substantial positive correlation between CU and the equity sector, particularly in the medium term (48 months), confirming the asymmetric relationship. Moreover, our results confirm heterogeneous market responses to different climate risks. The findings support the hedging and safe-haven characteristics of the equity sector with regard to climate risk. Finally, these outcomes have implications for policymakers and investors seeking to enhance the market stability and performance of their portfolios. Therefore, investors should consider including Chinese stocks in their portfolios to mitigate climate risk.

Suggested Citation

  • Ali, Shoaib & Xiaoyang, Xu & Alharbi, Samar S. & Rasheed, Muhammad Shahid, 2025. "Financial markets and environmental risks: unveiling the impact of climate uncertainty," Research in International Business and Finance, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:riibaf:v:78:y:2025:i:c:s0275531925002545
    DOI: 10.1016/j.ribaf.2025.102998
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    More about this item

    Keywords

    Climate risk; Chinese equity sector; wavelet analysis; portfolio;
    All these keywords.

    JEL classification:

    • C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F30 - International Economics - - International Finance - - - General

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