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

Stephane GOUTTE, Wang Yihan , Bouri Elie, Sokhanvar Amin

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.

Publication type: 
Scientific Article
Date de parution: 
International Review of Economics & Finance