Greater fragility, greater exposure: A network-based analysis of climate policy uncertainty shocks and G20 stock markets stability

Abstract

We investigate the impact of climate policy uncertainty shocks on stock market stability in both developed and emerging G20 economies. Using the network connectedness framework developed by Diebold and Yılmaz (2014), we quantify the risk spillover effects of climate policy uncertainty across various economics. Then, we employ the minimum spanning tree method to identify key risk transmission chains and analyze the changes after the implementation of the Paris Agreement. Our findings indicate that economies with robust financial systems exhibit stronger resilience to climate policy uncertainty shocks, while emerging markets show greater connectedness fluctuations and longer recovery periods after these shocks. Economies with weaker financial systems suffer more severe adverse effects. Furthermore, stable financial systems are becoming key nodes in the risk transmission network post the Paris Agreement, reflecting structural changes in global financial markets in response to climate policy shocks. Our research contributes to the growing literature of how climate policy uncertainty shock affects financial stability through complex networks analysis.