Climate policy uncertainty and financial market behavior
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2025-07-04
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en
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This study investigates the time-varying bidirectional relationship between climate policy uncertainty (CPU) and financial market behaviour. While existing literature suggests that CPU can influence asset prices, little is known about whether this influence is stable over time or whether feedback effects from markets back to policy uncertainty also occur. Using monthly data from 2004 to 2024 and applying time-varying Granger Causality techniques, this study analyses the interaction between CPU and green and brown equity returns.
The full-sample analysis finds no consistent, significant causality in either direction. This suggests that CPU is not a constant driver of market returns. However, the rolling-window analysis reveals that the relationship is episodic and context-dependent. During the 2022-2024 period, marked by heightened uncertainty, CPU episodically and significantly predicted green and brown market returns. In contrast, in 2019, brown market performance preceded movements in CPU, suggesting short-lived feedback effects.
The main contribution lies in showing that CPU acts as a conditional risk factor within financial systems: mostly exogenous, but occasionally endogenous. These results have implications for policymakers, investors, and financial stability, especially during climate-related transitions.
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Faculteit der Managementwetenschappen