A VAR with Threshold Stochastic Volatility for State-Dependent Climate–Energy–Industry Dynamics

Jingye Qian, Juan Miguel Marín Díazaraque and Helena Veiga

DES - Working Papers. Statistics and Econometrics. WS from Universidad Carlos III de Madrid. Departamento de Estadística

Abstract: We develop a structural VAR with Threshold Stochastic Volatility (VAR-TSV) to study state-dependent transmission among climate conditions, energy prices, and industrial activity. The model combines volatility-in-mean effects with a threshold in log-volatility dynamics that generates discrete shifts between low- and high-volatility states, while keeping VAR propagation and contemporaneous identification unchanged across regimes. The threshold is an observed Low Economic Growth indicator that shifts the level of industrial volatility. We estimate the model in a Bayesian framework and apply it to monthly data for seven European economies (1970s to 2023, varying according to availability) using temperature anomalies, CPI inflation in energy and industrial production growth. Volatility-shock impulse responses and volatility-state-conditional connectedness reveal strong cross-country heterogeneity, with high resilience in Northern Europe, high sensitivity in Central Europe, and high persistence in Southern Europe.

Keywords: Bayesian; VAR; Climate; uncertainty; Connectedness; Energy; transition; Stochastic; threshold; volatility; Volatility-in-mean; Volatility; regimes (search for similar items in EconPapers)
JEL-codes: C11 C32 Q43 Q54 (search for similar items in EconPapers)
Date: 2026-02-16
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Persistent link: https://EconPapers.repec.org/RePEc:cte:wsrepe:49327

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