Climate policy shocks and market dynamics: Analysis of green and brown equities in China's energy sector using Diebold-Yilmaz connectedness framework

This study investigates how renewable energy policy announcements influenced stock return dynamics among green and brown firms in China’s energy sector. Using high-frequency data and applying the Diebold-Yilmaz Connectedness Index within a Vector Autoregression framework, we assess market reactions across major firms categorized by environmental orientation and ownership structure. Findings reveal that green firms act as net transmitters of financial stability, while brown firms primarily absorb shocks during climate policy events. State-owned enterprises exhibit greater variability in connectedness compared to private firms, indicating ownership-based heterogeneity in policy sensitivity. By combining event study methodology with connectedness analysis, this paper offers novel insights into firm-level responses to climate regulation. Results inform policymakers and investors about transition risks and underscore the importance of differentiated strategies to ensure financial stability during sustainability transitions. Future research should investigate how small and medium enterprises (SMEs) and foreign-owned firms affect market responses to domestic climate policy. • Green firms transmit fewer climate policy shocks, stabilizing financial markets • Brown firms absorb more volatility, revealing vulnerability to policy shocks • Diebold-Yilmaz index to model dynamic firm-level market connectedness • Ownership structure affects how Chinese firms respond to climate policies • Policy insights support green investments and risk mitigation in brown firms