IDEAS home Printed from https://ideas.repec.org/a/gam/jsusta/v17y2025i20p9044-d1769778.html
   My bibliography  Save this article

Do Physical and Transition Climate Risks Drive the Volatility and Dynamic Correlations Between Fossil Energy Markets and Stocks Prices of Clean Energy?

Author

Listed:
  • Ying Zhang

    (Institute of Environment and Economics, Faculty of Economics, Liaoning University, Shenyang 110036, China)

  • Weifeng Li

    (Institute of Environment and Economics, Faculty of Economics, Liaoning University, Shenyang 110036, China)

  • Li Yang

    (School of Finance and Trade, Faculty of Economics, Liaoning University, Shenyang 110036, China)

Abstract

Climate risks are one of the major challenges facing sustainable development. This study examines how physical and transition climate risks influence the volatility and correlation of fossil energy futures and clean energy stock indices, using a mixed-frequency modeling framework. Taking the Paris Agreement as the starting point for the global energy transition, we aim to compare the impacts of climate risks on various fossil energy assets and clean energy assets and investigate how the dynamic linkages between clean energy and fossil energy assets have evolved under the influence of climate risks. The results show that climate risks have increased the volatility of fossil energy and clean energy assets to varying degrees. Correlation patterns vary by energy type: crude oil futures and clean energy indices exhibit a decoupling trend under climate risks, while natural gas futures show a more consistent, positive linkage. These findings not only provide useful guidance for investors in formulating more effective strategies under increasing climate risks but also offer policymakers valuable insights into designing optimal approaches to balance decarbonization objectives with energy security.

Suggested Citation

  • Ying Zhang & Weifeng Li & Li Yang, 2025. "Do Physical and Transition Climate Risks Drive the Volatility and Dynamic Correlations Between Fossil Energy Markets and Stocks Prices of Clean Energy?," Sustainability, MDPI, vol. 17(20), pages 1-26, October.
    • Handle: RePEc:gam:jsusta:v:17:y:2025:i:20:p:9044-:d:1769778
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2071-1050/17/20/9044/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2071-1050/17/20/9044/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Gong, Xue & Lai, Ping & He, Mengxi & Wen, Danyan, 2024. "Climate risk and energy futures high frequency volatility prediction," Energy, Elsevier, vol. 307(C).
    2. Bihong Huang & Maria Teresa Punzi & Yu Wu, 2021. "Do Banks Price Environmental Transition Risks? Evidence from a Quasi-Natural Experiment in a Chinese Province," IMF Working Papers 2021/228, International Monetary Fund.
    3. Xiuzhen, Xie & Zheng, Wenxiu & Umair, Muhammad, 2022. "Testing the fluctuations of oil resource price volatility: A hurdle for economic recovery," Resources Policy, Elsevier, vol. 79(C).
    4. Giovanna Bua & Daniel Kapp & Federico Ramella & Lavinia Rognone, 2024. "Transition versus physical climate risk pricing in European financial markets: a text-based approach," The European Journal of Finance, Taylor & Francis Journals, vol. 30(17), pages 2076-2110, November.
    5. Zhang, Hongwei & Hong, Huojun & Ding, Shijie, 2023. "The role of climate policy uncertainty on the long-term correlation between crude oil and clean energy," Energy, Elsevier, vol. 284(C).
    6. Simon Dietz & Nicholas Stern, 2015. "Endogenous Growth, Convexity of Damage and Climate Risk: How Nordhaus' Framework Supports Deep Cuts in Carbon Emissions," Economic Journal, Royal Economic Society, vol. 0(583), pages 574-620, March.
    7. Dan Yi & Sheng Lin & Jianlan Yang, 2025. "Global Climate Risk Perception and Its Dynamic Impact on the Clean Energy Market: New Evidence from Contemporaneous and Lagged R 2 Decomposition Connectivity Approaches," Sustainability, MDPI, vol. 17(8), pages 1-29, April.
    8. Evangelos Kyritsis & Apostolos Serletis, 2019. "Oil Prices and the Renewable Energy Sector," The Energy Journal, , vol. 40(1_suppl), pages 337-364, June.
    9. Basher, Syed Abul & Sadorsky, Perry, 2024. "Do climate change risks affect the systemic risk between the stocks of clean energy, electric vehicles, and critical minerals? Analysis under changing market conditions," Energy Economics, Elsevier, vol. 138(C).
    10. Huang, Bihong & Punzi, Maria Teresa & Wu, Yu, 2021. "Do banks price environmental transition risks? Evidence from a quasi-natural experiment in China," Journal of Corporate Finance, Elsevier, vol. 69(C).
    11. Jianing Liu & Jingyi Guo & Yuanyuan Man, 2025. "Ripple Effects of Climate Policy Uncertainty: Risk Spillovers Between Traditional Energy and Green Financial Markets," Sustainability, MDPI, vol. 17(12), pages 1-20, June.
    12. Dietz, Simon & Stern, Nicholas, 2015. "Endogenous growth, convexity of damage and climate risk: how Nordhaus’ framework supports deep cuts in carbon emissions," LSE Research Online Documents on Economics 58406, London School of Economics and Political Science, LSE Library.
    13. Eric Ghysels & Arthur Sinko & Rossen Valkanov, 2007. "MIDAS Regressions: Further Results and New Directions," Econometric Reviews, Taylor & Francis Journals, vol. 26(1), pages 53-90.
    14. Colacito, Riccardo & Engle, Robert F. & Ghysels, Eric, 2011. "A component model for dynamic correlations," Journal of Econometrics, Elsevier, vol. 164(1), pages 45-59, September.
    15. Xi, Yue & Zeng, Qing & Lu, Xinjie & Huynh, Toan L.D., 2022. "Oil and renewable energy stock markets: Unique role of extreme shocks," Energy Economics, Elsevier, vol. 109(C).
    16. Geng, Jiang-Bo & Liu, Changyu & Ji, Qiang & Zhang, Dayong, 2021. "Do oil price changes really matter for clean energy returns?," Renewable and Sustainable Energy Reviews, Elsevier, vol. 150(C).
    17. Siddique, Md. Abubakar & Nobanee, Haitham & Hasan, Md. Bokhtiar & Uddin, Gazi Salah & Hossain, Md. Naiem & Park, Donghyun, 2023. "How do energy markets react to climate policy uncertainty? Fossil vs. renewable and low-carbon energy assets," Energy Economics, Elsevier, vol. 128(C).
    18. Yuan, Di & Li, Sufang & Li, Rong & Zhang, Feipeng, 2022. "Economic policy uncertainty, oil and stock markets in BRIC: Evidence from quantiles analysis," Energy Economics, Elsevier, vol. 110(C).
    19. Ferrer, Román & Shahzad, Syed Jawad Hussain & López, Raquel & Jareño, Francisco, 2018. "Time and frequency dynamics of connectedness between renewable energy stocks and crude oil prices," Energy Economics, Elsevier, vol. 76(C), pages 1-20.
    20. Iyke, Bernard Njindan, 2024. "Climate change, energy security risk, and clean energy investment," Energy Economics, Elsevier, vol. 129(C).
    21. Shufen Cao & Min Pang & Yongtan Ma & Qianyu Dong & Yongping Tao, 2025. "Risk Spillover Effects in Energy Markets Under Climate Change: Evidence from the Chinese Market," Sustainability, MDPI, vol. 17(5), pages 1-20, March.
    22. Gong, Xu & Xu, Jun, 2022. "Geopolitical risk and dynamic connectedness between commodity markets," Energy Economics, Elsevier, vol. 110(C).
    23. Adebayo, Tomiwa Sunday & Awosusi, Abraham Ayobamiji & Bekun, Festus Victor & Altuntaş, Mehmet, 2021. "Coal energy consumption beat renewable energy consumption in South Africa: Developing policy framework for sustainable development," Renewable Energy, Elsevier, vol. 175(C), pages 1012-1024.
    24. Chaofeng Tang & Kentaka Aruga & Yi Hu, 2023. "The Dynamic Correlation and Volatility Spillover among Green Bonds, Clean Energy Stock, and Fossil Fuel Market," Sustainability, MDPI, vol. 15(8), pages 1-23, April.
    25. Li, Zheng Zheng & Su, Chi-Wei & Moldovan, Nicoleta-Claudia & Umar, Muhammad, 2023. "Energy consumption within policy uncertainty: Considering the climate and economic factors," Renewable Energy, Elsevier, vol. 208(C), pages 567-576.
    26. Gu, Fu & Wang, Jiqiang & Guo, Jianfeng & Fan, Ying, 2020. "How the supply and demand of steam coal affect the investment in clean energy industry? Evidence from China," Resources Policy, Elsevier, vol. 69(C).
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yan, Wan-Lin & Cheung, Adrian (Wai Kong), 2025. "Quantile connectedness among climate policy uncertainty, news sentiment, oil and renewables in China," Research in International Business and Finance, Elsevier, vol. 76(C).
    2. Ahmed, Walid M.A. & Sleem, Mohamed A.E., 2023. "Short- and long-run determinants of the price behavior of US clean energy stocks: A dynamic ARDL simulations approach," Energy Economics, Elsevier, vol. 124(C).
    3. Su, Chi Wei & Song, Xin Yue & Dou, Junyi & Qin, Meng, 2025. "Fossil fuels or renewable energy? The dilemma of climate policy choices," Renewable Energy, Elsevier, vol. 238(C).
    4. Gong, Xu & Liao, Qin, 2024. "Physical climate risk attention and dynamic volatility connectedness among new energy stocks," Energy Economics, Elsevier, vol. 136(C).
    5. Zhang, Hongwei & Hong, Huojun & Ding, Shijie, 2023. "The role of climate policy uncertainty on the long-term correlation between crude oil and clean energy," Energy, Elsevier, vol. 284(C).
    6. Elie Bouri & Tom L. Dudda & Lavinia Rognone & Thomas Walther, 2025. "Climate risk and the nexus of clean energy and technology stocks," Annals of Operations Research, Springer, vol. 347(1), pages 445-469, April.
    7. Hu, Zinan & Borjigin, Sumuya, 2024. "The amplifying role of geopolitical Risks, economic policy Uncertainty, and climate risks on Energy-Stock market volatility spillover across economic cycles," The North American Journal of Economics and Finance, Elsevier, vol. 71(C).
    8. Yun‐Shi Dai & Peng‐Fei Dai & Wei‐Xing Zhou, 2025. "Geopolitical Risk and the Volatility of the International Grain Futures Market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 45(10), pages 1757-1794, October.
    9. Yun-Shi Dai & Peng-Fei Dai & Wei-Xing Zhou, 2024. "The impact of geopolitical risk on the international agricultural market: Empirical analysis based on the GJR-GARCH-MIDAS model," Papers 2404.01641, arXiv.org.
    10. Tian, Lihui & Li, Xin & Lee, Cheng-Wen & Spulbăr, Cristi, 2024. "Investigating the asymmetric impact of artificial intelligence on renewable energy under climate policy uncertainty," Energy Economics, Elsevier, vol. 137(C).
    11. Wang, Minglu & Ouyang, Kexin & Jing, Peng, 2025. "Dynamic interplay of energy uncertainty, supply chain disruption, and digital transformation on China's renewable energy stocks," Energy Economics, Elsevier, vol. 141(C).
    12. Kuziboev, Bekhzod & Ozturk, Ilhan & Kalandarov, Feruz & Samandarov, Ogabek & Bekjanov, Dilmurad & Makhmudov, Samariddin, 2025. "Promoting energy sources diversification through ESG performance," Energy, Elsevier, vol. 324(C).
    13. Duan, Xiaoping & Xiao, Ya & Ren, Xiaohang & Taghizadeh-Hesary, Farhad & Duan, Kun, 2023. "Dynamic spillover between traditional energy markets and emerging green markets: Implications for sustainable development," Resources Policy, Elsevier, vol. 82(C).
    14. Ozcelebi, Oguzhan & El Khoury, Rim & Yoon, Seong-Min, 2024. "Interplay between renewable energy and fossil fuel markets: Fresh evidence from quantile-on-quantile and wavelet quantile approaches," Energy Economics, Elsevier, vol. 140(C).
    15. Emre Cevik & Emrah I Cevik & Sel Dibooglu & Raif Cergibozan & Mehmet Fatih Bugan & Mehmet Akif Destek, 2024. "Connectedness and risk spillovers between crude oil and clean energy stock markets," Energy & Environment, , vol. 35(7), pages 3319-3339, November.
    16. Zhang, Jiahao & Chen, Xiaodan & Wei, Yu & Bai, Lan, 2023. "Does the connectedness among fossil energy returns matter for renewable energy stock returns? Fresh insights from the Cross-Quantilogram analysis," International Review of Financial Analysis, Elsevier, vol. 88(C).
    17. Chen, Yaling & Jiang, Qinnan & Dai, Zhifeng & Liu, Yinpeng, 2025. "The impact of climate policy uncertainty on the correlations between green bond and green stock markets," International Review of Financial Analysis, Elsevier, vol. 102(C).
    18. Umar, Muhammad & Farid, Saqib & Naeem, Muhammad Abubakr, 2022. "Time-frequency connectedness among clean-energy stocks and fossil fuel markets: Comparison between financial, oil and pandemic crisis," Energy, Elsevier, vol. 240(C).
    19. Ding, Hao & Ji, Qiang & Ma, Rufei & Zhai, Pengxiang, 2022. "High-carbon screening out: A DCC-MIDAS-climate policy risk method," Finance Research Letters, Elsevier, vol. 47(PA).
    20. Qiao, Sen & Guo, Zi Xin & Tao, Zhang & Ren, Zheng Yu, 2023. "Analyzing the network structure of risk transmission among renewable, non-renewable energy and carbon markets," Renewable Energy, Elsevier, vol. 209(C), pages 206-217.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jsusta:v:17:y:2025:i:20:p:9044-:d:1769778. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.