Impact of policy uncertainty on stock market volatility in the China’s low-carbon economy

Abstract

High speculation and volatility in China's stock market make enhancing volatility estimation and prediction in green and low-carbon sectors essential to meet the financing demands of the carbon-neutral industry and ensure sustainable development. In this study, we first introduce the CBOE Volatility Index (VIX) into the DAGM model to construct an improved model, DAGM-VIX, to explore the impact of China's Economic Policy Uncertainty (CEPU) and Climate Policy Uncertainty (CPU) on the stock market volatility of China's low-carbon economy. In addition, economic policy uncertainty is further decomposed into related uncertainties such as fiscal policy, monetary policy, trade policy, and exchange rate and capital account policy to explore in depth the heterogeneity of their impacts on stock market volatility of low-carbon economy. The results show that CEPU and CPU have a significant impact on the long-term volatility of China's green and low-carbon industries, and there are differences in the impact of uncertainty on stock market volatility in different policy areas. Compared with original DAGM and GM models, the DAGM-VIX model is superior in its predictive ability, and the DAGM-VIX-CEPU model, in particular, performs particularly well in predicting the volatility of green and low-carbon transition industries.