Does climate policy uncertainty drive industry bond credit risk spillovers? New evidence from causality and impact paths in the frequency domain

Due to climate policy uncertainty, the credit risk spillovers among industry bonds have become more dynamic and less predictable, which may increase the financing costs of corporations and undermine the implementation effectiveness of climate policies. This work quantifies the frequent credit risk spillovers among industry bonds by employing the time-varying parameter vector autoregression (TVP-VAR) frequency connectedness model. The causality and impact paths from climate policy uncertainty to frequent credit risk spillovers are further assessed using non-parametric causality-in-quantiles tests and the frequency minimum spanning tree (MST) model. The results indicate that: (i) industry bond credit risk spillovers are driven by short-term spillovers. (ii) The directional credit risk spillovers from cyclical industries to other industries are greater than those from consumption, service and support industries at different frequencies. (iii) There is a significant causality from climate policy uncertainty to directional credit risk spillovers of consumption and cyclical industries under at different frequencies and market conditions. (iv) Climate policy uncertainty triggers credit risk spillovers in the short and medium terms by directly affecting agriculture, forestry, animal husbandry and fishery industries. (v) The direct paths by which climate policy uncertainty affects credit risk spillovers increase in the long term.