Policy intervention and stock market stability risks: Evidence from carbon emission trading policy on energy firms in China

Abstract

Stock market volatility, crucial for financial risk management and investment decisions, is significantly influenced by carbon emissions trading policies. This study applies the GARCH-MIDAS-EPU model to estimate the long- and short-term volatilities of 30 A-share energy firms and employs the HD-TVP-VAR model to assess contagion effects. Using carbon emissions trading policy as a quasi-natural experiment, it examines the policy’s impact on firm-level volatility and net spillovers. The results indicate that short-term volatility exhibits strong clustering, while long-term volatility follows a non-linear adjustment path with regime shifts. Increased short-term volatility spillovers amplify contagion risks, whereas persistent long-term spillovers suggest sustained investor focus. Carbon emissions trading heightens firm-level volatility and influences short-term spillover dynamics but has an insignificant effect on the long-term net spillover index. The policy’s impact varies by firm characteristics, with centrally state-owned firms facing fewer financial constraints benefiting most from incentives.