Climate risk performance and tail risk contagion in energy stock markets: Evidence from China

Abstract

Climate change has resulted in unexpected changes to the energy market. This paper constructs a GARCH-MIDAS model to examine the impact of climate risk performance on the risk contagion within and across China’s energy markets, from both perspectives of tail risk spillovers and firm-level systemic importance. Moreover, Granger causality test is employed to capture the heterogeneity with respect to region and enterprise characteristics. The results show that climate policy significantly intensifies the risk contagion effect in China’s energy markets, in which the clean energy sectors are the most susceptible. It is further found that climate concern tends to affect the spillovers ”from” and ”to” those clean energies that are currently in high demands for funding, while climate physical risk only renders significant effects on the cross-sector connectedness related to coal industry. In addition, the results of heterogeneity analysis indicate enterprises in south China are easily affected by investors’ concern about climate change, while those in east and southwest provinces are susceptible to physical risk. Also, we find that the systemic importance of state-owned enterprises are easily altered by physical risk and climate policy, while that of private firms is vulnerable to investors’ climate concern.