Energy-Related Uncertainty and Idiosyncratic Return Volatility: Implications for Sustainable Investment Strategies in Chinese Firms

Faiza Siddiqui, Yusheng Kong, Hyder Ali () and Salma Naz
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Faiza Siddiqui: School of Finance and Economics, Jiangsu University, Zhenjiang 212013, China
Yusheng Kong: School of Finance and Economics, Jiangsu University, Zhenjiang 212013, China
Hyder Ali: Faculty of Management Sciences, Sukkur IBA University, Sukkur 65200, Pakistan
Salma Naz: Faculty of Management Sciences, Sukkur IBA University, Sukkur 65200, Pakistan

Sustainability, 2024, vol. 16, issue 17, 1-39

Abstract: This study examines the impact of energy-related uncertainty on idiosyncratic volatility (IVOL) in Chinese firms, leveraging data from the Shanghai and Shenzhen stock exchanges between 2007 and 2022. Utilizing the Energy-Related Uncertainty Index (EUI) and the Fama–French five-factor model, we analyze a comprehensive dataset of 20,998 firm-year observations to understand how macroeconomic uncertainties specific to the energy sector influence firm-specific risk. Our findings reveal that a one-unit increase in the EUI is associated with a 5.1% rise in idiosyncratic volatility across all firms, underscoring the significant impact of energy-related uncertainty on firm-specific risks. The effect is more pronounced in energy-related firms, where a one-unit increase in the EUI leads to a 6.4% increase in IVOL, compared to a 3.7% increase in non-energy-related firms. By incorporating industry-wise, heterogeneity, and phase-based analyses, our findings reveal significant variations in the EUI’s impact across energy and non-energy sectors. State-owned enterprises, firms with high ownership concentration, and smaller firms are more vulnerable to energy uncertainties. Additionally, the effect of the EUI on IVOL is more pronounced during periods of high uncertainty. These insights have important implications for sustainable investment strategies, risk management, and policymaking, providing a deeper understanding of the intricate dynamics of energy markets in fostering sustainable economic growth and development.

Keywords: sustainability; idiosyncratic volatility; energy-related uncertainty; Fama–French five-factor model; Chinese firms; energy sector; risk management; sustainable investment strategies; economic development (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2024
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