Information linkages across countries around net zero announcements

Abstract

This study investigates the information linkages around net zero announcements across countries. Relying on rational expectation theory, this study employs the generalized method of moments (GMM) as well as the implied volatility approach to quantify volatility linkages between exchange-traded funds (ETFs) from nine countries and a global ETF (WLD). The GMM analysis reveals that volatility linkages among country ETFs and WLD range from 39.67 % to 71.43 %, while the implied volatility approach indicates that volatility linkages between markets range from 32.31 % to 65.36 %, indicating significant information spillover across countries. A time-varying dynamic analysis further shows that the US Government's net zero announcement increased volatility linkages across markets by 8.7 % to 58.05 %, signaling market approval of the US commitment to net zero targets. Multivariate analysis of the monthly correlation between country ETFs and WLD shows that the US plays a pivotal role. Although net zero announcements by the US, UK, and China individually impacted market correlations, the effect of China's announcement was insignificant when all announcements were considered in the model. Without US participation, efforts by other countries to achieve global net zero goals are unlikely to succeed.