Policy uncertainty, geopolitical risks and China’s carbon neutralization

Abstract

In the present study, it was explored how the volatility of the carbon neutrality concept index (CNCI) was affected by China economic policy uncertainty (CEPU) index, climate policy uncertainty (CPU) index, and geopolitical risk (GPR) index. According to the research of Amendola et al. the GARCH-MIDAS model was improved by introducing the realized kernel volatility of China stock market into the short-term volatility component. On this basis, the GARCH-RKV-MIDAS model was constructed. Meanwhile, both GARCH-MIDAS and GARCH-RKV-MIDAS models were applied to identify the influencing factors for CNCI volatility during the period between January 2018 and June 2022, with CNCI predicted. According to the research results, both the CPU index and the GPR index exert a significant effect on the long-term volatility of CNCI, despite no significant difference made by the CEPU index to the long-term volatility of CNCI. As for the prediction of CNCI volatility, the GARCH-RKV-MIDAS model clearly outperforms the GARCH-MIDAS model. Moreover, the CPU index outperforms the GPR index and the CEPU index in predicting the volatility of the CNCI.