Risk or resilience? Assessing the impact of climate policy uncertainty on MENA stock markets: A ST-VECM analysis

We investigate the dynamic interplay between climate policy uncertainty (CPU), geopolitical risk (GPR), oil prices, and stock market performance within the Middle East and North Africa (MENA) region, considering the dependence of the region's economies on oil. CPU is used to capture a nuanced understanding of how global environmental policy uncertainties shape financial market dynamics. Employing a Smooth Transition Vector Error Correction Model, we analyze both long-term co-integration and short-term fluctuations. The results reveal that oil and capital market shocks have a similar, initially positive impact on the Dow Jones MENA index (DJMENA), while the responses to CPU and GPR differ over time. Geopolitical shocks initially boost the DJMENA index owing to supply disruptions, but eventually exert a negative impact as alternative energy investments may increase in the long run. However, the DJMENA index responds positively to increasing uncertainty in the CPU. In the short run, oil and capital market shocks account for up to 98 % of the variation in the DJMENA index, whereas the CPU and GPR play a larger role in the long run. The historical decomposition highlights how the COVID-19 pandemic and the Russia–Ukraine conflict further intensified market volatility. Although the GPR exerts a more pronounced immediate effect, CPU's impact intensifies over time, highlighting the necessity for MENA markets to account for climate uncertainty in their financial strategies. These findings underscore the importance of adapting to shifting global pressures to maintain resilient performance in oil-dependent economies.