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The importance of climate policy uncertainty in forecasting the green, clean and sustainable financial markets volatility

Author

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  • S. A. Raza
  • K. A. Khan
  • R. Benkraiem

    (Audencia Business School)

  • K. Guesmi

Abstract

This research represents the first empirical evidence highlighting the significant role of climate policy uncertainty in predicting the green, clean, and sustainable financial markets volatility. The analysis incorporates Gavriilidis's (2021) recently introduced news-based climate policy uncertainty index. To conduct this investigation, an advanced econometric approach, namely GARCH-MIDAS, has been employed, considering two sample periods: (i) full period (ii) COVID-19 period. Furthermore, the study reveals that climate policy uncertainty amplifies volatility of the S&P Green Bond Index, S&P Global Clean Energy Index, and Dow Jones Sustainability Index, rendering these indices highly sensitive to such uncertainty. Additionally, the out-of-sample analysis demonstrates climate policy uncertainty as a strong predictor, with the GARCH-MIDAS model displaying superior predictive accuracy. The findings of this research bear significant implications for strategies related to risk mitigation and diversification of portfolio particularly for investors, policymakers, and portfolio managers.

Suggested Citation

  • S. A. Raza & K. A. Khan & R. Benkraiem & K. Guesmi, 2024. "The importance of climate policy uncertainty in forecasting the green, clean and sustainable financial markets volatility," Post-Print hal-04720742, HAL.
    • Handle: RePEc:hal:journl:hal-04720742
    DOI: 10.1016/j.irfa.2023.102984
    Note: View the original document on HAL open archive server: https://hal.science/hal-04720742v1
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    3. Ting Zhang & Hai-Chuan Xu & Wei-Xing Zhou, 2025. "The impact of external uncertainties on the extreme return connectedness between food, fossil energy, and clean energy markets," Papers 2503.06603, arXiv.org.
    4. Wu, Jiawen & Li, Jing-Ping & Su, Chi-Wei, 2024. "Can green bond hedges climate policy uncertainty in the United States: New insights from novel time-varying causality and quantile-on-quantile methods?," Economic Analysis and Policy, Elsevier, vol. 82(C), pages 1158-1176.
    5. Marina Albanese & Guglielmo Maria Caporale & Ida Colella & Nicola Spagnolo, 2025. "Climate Policies, Energy Shocks and Spillovers Between Green and Brown Stock Price Indices," CESifo Working Paper Series 11747, CESifo.
    6. Chiang, Thomas C., 2025. "The effect of climate policy uncertainty and induced risks on US aggregate and sectoral stock returns," Research in International Business and Finance, Elsevier, vol. 76(C).
    7. Cao, Yufei, 2025. "Impact of climate change on dynamic tail-risk connectedness among stock market social sectors: Evidence from the US, Europe, and China," The North American Journal of Economics and Finance, Elsevier, vol. 75(PB).
    8. Ben Jabeur, Sami & Gozgor, Giray & Rezgui, Hichem & Mohammed, Kamel Si, 2024. "Dynamic dependence between quantum computing stocks and Bitcoin: Portfolio strategies for a new era of asset classes," International Review of Financial Analysis, Elsevier, vol. 95(PB).
    9. Banerjee, Ameet Kumar & Özer, Zeynep Sueda & Rahman, Molla Ramizur & Sensoy, Ahmet, 2024. "How does the time-varying dynamics of spillover between clean and brown energy ETFs change with the intervention of climate risk and climate policy uncertainty?," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 442-468.
    10. Alshammari, Saad & Serret, Vanessa & Tiwari, Sunil & Si Mohammed, Kamel, 2025. "Industry 4.0 and AI amid economic uncertainty: Implications for sustainable markets," Research in International Business and Finance, Elsevier, vol. 75(C).
    11. Qiao, Sen & Chang, Yuan & Mai, Xi Xi & Dang, Yi Jing, 2024. "Climate policy uncertainty, clean energy and energy metals: A quantile time-frequency spillover study," Energy Economics, Elsevier, vol. 139(C).
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