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Climate Policies, Energy Shocks and Spillovers Between Green and Brown Stock Price Indices

Author

Listed:
  • Marina Albanese
  • Guglielmo Maria Caporale
  • Ida Colella
  • Nicola Spagnolo

Abstract

This paper examines the effects of climate policies and energy shocks on mean and volatility spillovers between green and brown stock price indices in five countries (Canada, India, Japan, the UK and the US). More specifically, bivariate GARCH-BEKK models including dummy variables controlling for these shocks are estimated using weekly series with start dates ranging from 13 March 2009 to 24 August 2012 (depending on data availability for the green index) and an end date of 29 December 2023. Significant dynamic linkages between green and brown indices are found when climate policy and oil shocks are considered jointly. Some common patterns emerge, such as shifts in spillover dynamics between green and brown assets, but also country-specific effects of the climate policy shocks which reflect differences in regulatory frameworks and policies. By contrast, energy shocks tend to have a more uniform impact. Further, the interaction between climate policy and energy shocks weakens cross-market linkages, enhancing portfolio diversification opportunities for green investors. The conditional correlation analysis confirms this finding, suggesting that green stocks can be used as an effective hedge. These results highlight the benefits of incorporating green assets into diversified portfolios, particularly in financial centers where, in recent years, they have offered higher returns and lower volatility.

Suggested Citation

  • Marina Albanese & Guglielmo Maria Caporale & Ida Colella & Nicola Spagnolo, 2025. "Climate Policies, Energy Shocks and Spillovers Between Green and Brown Stock Price Indices," CESifo Working Paper Series 11747, CESifo.
  • Handle: RePEc:ces:ceswps:_11747
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    More about this item

    Keywords

    brown stocks; green stocks; VAR; GARCH-BEKK; climate policy shocks; energy shocks; spillovers;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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