Does climate policy uncertainty affect Chinese stock market volatility?

Abstract

Global warming forces policymakers to change climate policies to achieve global carbon neutrality targets. Although policy changes and developments affect financial asset price volatility, unpredictable climate policy changes make policy decisions less certain. This study investigates the spillover effects of climate policy uncertainty (CPU) on Chinese stock market volatility in the realized GARCH-MIDAS framework. To capture more information on asset price volatility, we further employ 5-min high-frequency data. The empirical results provide strong evidence to support that our strategy can successfully improve volatility forecasting accuracy. First, in-sample results indicate that CPU has a significant effect on stock price volatility. Second, out-of-sample tests confirm that the extended model that considers both CPU and high-frequency data exhibits the best predictive ability. In addition, various robustness tests strongly demonstrate our main findings. Thus, this paper demonstrates that weather effects exist in the stock market and reminds investors that they should pay more attention to climate policies in the current period of the climate crisis.