Geopolitical risk and energy markets in China

Abstract

We examine the impact of geopolitical risk (GPR) on China's energy markets, focusing on carbon emission allowance prices, the clean energy stock index, the environmental–social–governance (ESG) 100 stock index, and the gas and oil stock index. Using a quantile-on-quantile regression with kernel regularized least squares methodology, we analyze weekly data from China from March 2, 2015, to December 26, 2022. Findings reveal that GPR negatively affects carbon market prices and ESG stocks, particularly when these markets are in weaker states. Conversely, clean energy stocks benefit from geopolitical uncertainties under favorable market conditions, while traditional energy stocks exhibit resilience and even strengthen due to their strategic importance during periods of heightened GPR. Moreover, GPR significantly drives energy market volatility, with amplified effects in high-volatility market conditions. This quantile-specific approach provides a nuanced understanding of how GPR influences energy assets, emphasizing the importance of tailored risk management strategies. Our findings highlight the necessity of integrating GPR assessments into investment decisions and policy frameworks to reduce the uncertainty affecting China's energy markets. • Examine the nonlinear and asymmetric impact of geopolitical risk on energy markets. • Use the quantile-on-quantile regression with kernel regularized least squares method. • We provide guidance on better managing risks in energy markets in China.