Asymmetric and regime-dependent connectedness between climate policy uncertainty and Islamic sectoral equities in GCC markets: Implication on portfolio hedging

Climate policy uncertainty drives market volatility, influencing investment in climate-sensitive and ethical assets, especially in Sharia-compliant regions like the Gulf Cooperation Council (GCC) where understanding its spillovers is vital for portfolio and economic resilience. Given this scenario, this study investigates the dynamic and asymmetric connectedness between climate policy uncertainty (CPU) and Islamic stock sectors in GCC countries, with implications for portfolio hedging. Using the TF-QVAR and asymmetric TVP-VAR models on data from February 2020 to April 2025, we uncover how CPU affects Islamic equities—a critical component of ethical investment. Findings reveal that connectedness intensifies during bearish (78.12%) and bullish (77.62%) regimes and weakens in normal conditions (35.95%), with CPU shifting from a net receiver to transmitter in stable markets. Industrials, Financials, and Energy sectors consistently transmit shocks, while CPU absorbs them; Healthcare, Utilities, and Consumer Services remain neutral. Spillovers are dynamic and asymmetric, with crises amplifying short-term spillovers and bullish phases driving long-term connections. Negative shocks generate stronger contagion than positive ones. Directionally, CPU and Consumer sectors are net receivers, with CPU's role varying by sentiment. Portfolio analysis shows that the MConP offers a stable balance of risk and return across sectors and market regimes, outperforming MVP in downturns and MCorP in upswings due to its adaptability to asymmetric returns. Policy recommendations include enhancing stabilization funds, promoting diversification beyond hydrocarbons, strengthening underperforming sectors, and deepening regional equity market integration to support more effective risk management . • Climate policy uncertainty (CPU) strongly influences GCC Islamic equities, with spillovers that vary across market regimes. • Connectedness is highest in bearish (78.12%) and bullish (77.62%) markets, but weakens in normal times (35.95%). • Industrials, Financials, and Energy sectors transmit shocks, while Healthcare, Utilities, and Consumer Services remain largely neutral. • Negative shocks create stronger contagion than positive ones, with CPU shifting between being a receiver and a transmitter depending on market sentiment. • The Minimum Connectedness Portfolio (MConP) outperforms traditional strategies, offering better hedging and resilience for investors in volatile markets.