High-carbon screening out: A DCC-MIDAS-climate policy risk method

This paper modifies the traditional DCC-MIDAS model by incorporating the climate policy risk to examine its effect on the correlations between high- and low-carbon assets. Our results show that the climate policy risk has a negative effect on the long-term correlations between high- and low-carbon assets, although the extent of this effect varies across different asset categories. The results of portfolio performance analyses also show that when the climate policy risk is high, the effectiveness of low-carbon assets as a hedge of carbon-intensive assets decreases, while the performance of carbon-intensive portfolios diversified by low-carbon assets improves.