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How does climate policy uncertainty affect financial markets? Evidence from Europe

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  • Tedeschi, Marco
  • Foglia, Matteo
  • Bouri, Elie
  • Dai, Peng-Fei

Abstract

This study analyzes the time-varying effect of climate policy uncertainty (CPU) on the stock market and clean energy indices in the European context. For this purpose, we use the Bayesian time-varying parameter VAR model. The empirical results show that CPU shocks have a significant effect on the financial indexes. Returns on clean energy (crude oil) stocks increase (decrease) in response to heightened climate risk. Moreover, the COVID-19 pandemic is a relevant tipping point in CPU dynamics. These results offer important implications for European investors and policymakers in the context of the European climate-energy crisis.

Suggested Citation

  • Tedeschi, Marco & Foglia, Matteo & Bouri, Elie & Dai, Peng-Fei, 2024. "How does climate policy uncertainty affect financial markets? Evidence from Europe," Economics Letters, Elsevier, vol. 234(C).
    • Handle: RePEc:eee:ecolet:v:234:y:2024:i:c:s016517652300469x
    DOI: 10.1016/j.econlet.2023.111443
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    More about this item

    Keywords

    Climate policy uncertainty; Financial markets; Clean energy stock; Crude oil price; Time varying parameter VAR; Impulse response function;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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