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A VAR with Threshold Stochastic Volatility for State-Dependent Climate–Energy–Industry Dynamics

Author

Listed:
  • Qian, Jingye
  • Marín Díazaraque, Juan Miguel
  • Veiga, Helena

Abstract

We develop a structural VAR with Threshold Stochastic Volatility (VAR-TSV) to study state-dependent transmission among climate conditions, energy prices, and industrial activity. The model combines volatility-in-mean effects with a threshold in log-volatility dynamics that generates discrete shifts between low- and high-volatility states, while keeping VAR propagation and contemporaneous identification unchanged across regimes. The threshold is an observed Low Economic Growth indicator that shifts the level of industrial volatility. We estimate the model in a Bayesian framework and apply it to monthly data for seven European economies (1970s to 2023, varying according to availability) using temperature anomalies, CPI inflation in energy and industrial production growth. Volatility-shock impulse responses and volatility-state-conditional connectedness reveal strong cross-country heterogeneity, with high resilience in Northern Europe, high sensitivity in Central Europe, and high persistence in Southern Europe.

Suggested Citation

  • Qian, Jingye & Marín Díazaraque, Juan Miguel & Veiga, Helena, 2026. "A VAR with Threshold Stochastic Volatility for State-Dependent Climate–Energy–Industry Dynamics," DES - Working Papers. Statistics and Econometrics. WS 49327, Universidad Carlos III de Madrid. Departamento de Estadística.
    • Handle: RePEc:cte:wsrepe:49327
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    Keywords

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    JEL classification:

    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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