Effect of Climate Policy Uncertainty on the Relationship between Investor Sentiment and Metals and Mining Industry Index Returns: Time-Varying Granger Causality Approach

Recognizing the substantial contribution of the metals and mining (M&M) industry to climate change and global warming, it is anticipated that investor sentiments will exert influence over investment decisions, potentially affecting the stock prices of firms within this sector. Furthermore, uncertainties, particularly surrounding climate change policies, significantly shape investor behavior. This study endeavors to investigate the role of uncertainty in elucidating the relationship between investor sentiment and stock prices, focusing specifically on returns from the metals and mining sector index, which is highly related to climate change. Employing innovative rolling window and recursive evolving methodologies, we analyze the time-varying Granger causality from climate policy uncertainty to the dynamic conditional correlation between investor sentiment and returns on the M&M sector and the S&P 500 indices. Our findings demonstrate a notable increase in correlations between the M&M sector index returns and investor sentiment over time, highlighting nuanced responses within the metals and mining industry compared to the broader market. Additionally, our results reveal that climate policy uncertainty significantly influences the correlation between M&M index returns and investor sentiment, particularly following the Paris Climate Accords, suggesting heightened emotional investor responses during periods of increased policy uncertainty. However, this impact does not uniformly extend to the broader market, underscoring the sector-specific effects of policy uncertainties. These insights emphasize the importance for company stakeholders, managers, and investors to consider fluctuations in consumer confidence and policy uncertainties, recognizing the varying impacts across sectors to inform strategic decision-making.