The importance of climate policy uncertainty in forecasting the green, clean, and sustainable financial markets volatility

This research represents the first empirical evidence highlighting the significant role of climate policy uncertainty in predicting the green, clean, and sustainable financial markets volatility. The analysis incorporates Gavriilidis's (2021) recently introduced news-based climate policy uncertainty index. To conduct this investigation, an advanced econometric approach, namely GARCH-MIDAS, has been employed, considering two sample periods: (i) full period (ii) COVID-19 period. Furthermore, the study reveals that climate policy uncertainty amplifies volatility of the S&P Green Bond Index, S&P Global Clean Energy Index, and Dow Jones Sustainability Index, rendering these indices highly sensitive to such uncertainty. Additionally, the out-of-sample analysis demonstrates climate policy uncertainty as a strong predictor, with the GARCH-MIDAS model displaying superior predictive accuracy. The findings of this research bear significant implications for strategies related to risk mitigation and diversification of portfolio particularly for investors, policymakers, and portfolio managers.