Asymmetric Spillovers from Uncertainty in Climate Policy to the Financial Markets : An Econometric Approach

This article investigates the spillovers from uncertainty in climate policy (henceforth CUPI) on the returns and volatility of top global financial markets (Australia, France, England, Germany, Hong Kong, Brazil, Indonesia, South Korea, Mexico, India, Japan, and the United States and Canada) by employing Diebold & Yılmaz, 2014 and Baruník & Křehlík, (2018) methods and network graphs Our analysis reveals that, based on the DY connectedness methodology, the average connectedness for returns is 60.89% and for volatility it is 78.67%. In the case of BK, the overall connectedness increases from short-term to long-term, with a value of 67.80% for 6 months and beyond in terms of returns, while the highest average connectedness is reported for 3-6 months in terms of volatility. The network analysis for net-pairwise reveals that emerging economy financial markets received the most spillover in the event of a return. In the case of volatility, all long-term (6 months and beyond) financial markets experienced the greatest spillover from the change in the CUPI index. This study offers implications to the policy analyst, investors and portfolio managers