Climate Vulnerability as a Shock Amplifier: Climate Policy Uncertainty and Equity Market Resilience

Abstract

Almost every year, a single global climate policy shock reaches every market, yet its financial footprint is uneven. The present paper examines whether a country’s own climate vulnerability intensifies the way climate policy uncertainty is transmitted into equity market risk. The present study compiled a monthly panel of twenty countries comprising developed and emerging equity markets over the period from 2010 to 2025. Further, the present paper combines the climate policy uncertainty index with the vulnerability score of the Notre Dame Global Adaptation Initiative. As the countries are strongly interconnected, we relied on second-generation panel methods. The present paper employed the cross-sectional dependence test and the CIPS panel unit root test. The results confirmed that dependence is pervasive and the series are stationary. The core specification modifies climate policy uncertainty with vulnerability within a fixed-effects panel along with a panel quantile regression that examines the effect across the conditional distribution of the rolling volatility measure. The interaction is positive and highly significant. Markets that are more vulnerable are associated with a larger volatility response to the same climate policy shock, and the intensification is concentrated in the upper part of the conditional distribution rather than rising monotonically across all quantiles. A connectedness analysis showed that the developed economies are net transmitters while the more vulnerable emerging markets act as net receivers. The results survived the exclusion of China. The direct effect of climate policy uncertainty also carries over to sovereign spreads, although the vulnerability interaction on spreads is not statistically significant. The current study also provides investors and policymakers with a vulnerability-based ranking of resilience to climate policy shocks.