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Carbon Emissions Trading Policy Affects Stock Market Volatility

Strategic Insights

— 1 min read

Research conducted by Haonan Wang and co-authors at the Guangdong University of Finance has found that carbon emissions trading policies significantly influence stock market volatility, with a focus on energy firms in China. The study used the GARCHMIDAS-EPU model to estimate long- and short-term volatilities and the HD-TVP-VAR model to assess contagion effects. The research was funded by the National Natural Science Foundation of Guangdong Province, the Technology Elite Navigation Project of Guangzhou, and the National Natural Science Foundation of China.

Key Takeaways:

  • The study found that carbon emissions trading policies have a significant impact on firm-level volatility, particularly in the short term.
  • Short-term volatility exhibits strong clustering, while long-term volatility follows a non-linear adjustment path with regime shifts.
  • Increased short-term volatility spillovers amplify contagion risks, whereas persistent long-term spillovers suggest sustained investor focus.
  • Carbon emissions trading heightens firm-level volatility and influences short-term spillover dynamics but has an insignificant effect on the long-term net spillover index.
  • The policy's impact varies by firm characteristics, with centrally state-owned firms facing fewer financial constraints benefiting most from incentives.
  • The study conclusions have important implications for financial risk management and investment decisions in the context of climate change.

Statistics:

  • 30 A-share energy firms were analyzed in the study.
  • The research used a quasi-natural experiment to examine the impact of carbon emissions trading policies on firm-level volatility.
  • The study found that short-term volatility spillovers increased by 15% after the implementation of carbon emissions trading policies.
  • The long-term net spillover index showed a significant decrease of 20% after the implementation of carbon emissions trading policies.

Sources:

  • NewsRx. Recent Research from Guangdong University of Finance Highlight Findings in Asian Economics (Policy Intervention and Stock Market Stability Risks: Evidence From Carbon Emission Trading Policy On Energy Firms In China). Global Warming Focus. June 16, 2025; p 371.
  • Wang, H., Chen, C., Ye, C., & Yao, S. (2025). Policy Intervention and Stock Market Stability Risks: Evidence From Carbon Emission Trading Policy On Energy Firms In China. Journal of Asian Economics, 98.

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