Climate risks and the realized higher-order moments of financial markets: Evidence from China

Yihan Wang, Stephane Goutte, Elie Bouri and Amin Sokhanvar

International Review of Economics & Finance, 2024, vol. 93, issue PB, 1064-1087

Abstract: The return distribution of energy assets deviates from the normal distribution, making volatility a partial measure of risk, and climate risk tend to affect the skewness preferences of environmentally conscious investors. However, limited evidence exists on the impact of climate risk on higher-order moments of asset returns, especially in China. Using data from December 2013 to June 2022, we study the time-varying Granger causal flow from two Chinese climate uncertainty indices (Chinese climate policy uncertainty (CPU) and Chinese climate uncertainty (CU)) to the realized high-order moments (volatility, skewness, and kurtosis) of various Chinese assets covering green energy, carbon emission allowances, and brown energy indices. The main results show evidence of time-variation in the causal flows from climate risks, without ignoring the heterogeneity between the two climate risk measures and across the three assets under study. Granger causality spans various time periods, and is generally more significant for the realized volatility. These results are robust to the specification of the time-varying causality analysis. They also remain significant when accounting for the impact of Chinese economic policy uncertainty, which further supports their robustness. These findings highlight the ability of climate risk to affect higher-order moments of asset returns through the channels of strong deviation of returns from the normal distribution, the preference of investors for skewness, and the frequent occurrence of crisis periods.

Keywords: Chinese climate risks; Green energy; Carbon emission allowances; Oil and gas energy; Time-varying granger causality; Realized higher-order moments (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:93:y:2024:i:pb:p:1064-1087

DOI: 10.1016/j.iref.2024.04.042

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