Connectedness and spillovers in Islamic green finance under climate policy uncertainty

Abstract

Purpose This study aims to investigate how climate policy uncertainty (CPU) is connected with green sukuk and equity markets in Southeast Asia. It assesses whether CPU acts as a meaningful transmitter of shocks to green sukuk and equity returns, or whether spillovers are driven primarily by financial market linkages. Design/methodology/approach The analysis uses daily data for Global CPU, Malaysian and Indonesian green sukuk and the benchmark equity indices of Malaysia and Indonesia from October 3, 2022–December 30, 2024. The authors use the Diebold and Yilmaz connectedness framework based on generalized forecast error variance decomposition (H = 10) with a 252-trading day rolling window, complemented by generalized impulse response functions with bootstrap confidence bands. Findings The static results indicate moderate system-wide spillovers, with a Total Connectedness Index of 13.95, and spillovers largely concentrated in the equity segment. Cross-country equity linkages constitute the dominant transmission channel, and equity shocks contribute notably to sukuk yield fluctuations, particularly for Indonesian green sukuk. CPU is largely self-driven and contributes only marginally to the forecast error variance of sukuk and equity returns. Rolling estimates reveal time-varying connectedness, with stronger spillovers in early 2024, while net connectedness measures show that CPU is persistently a net receiver of shocks and Malaysian equities more frequently act as net transmitters. Lastly, generalized impulse responses further indicate that CPU shocks generate small and short-lived movements in sukuk and equity returns. Originality/value This paper provides new evidence on the spillover structure linking CPU with green sukuk and equity markets in an emerging Islamic finance context. The findings suggest that spillovers are equity led and that CPU plays a limited role in driving return dynamics, with implications for portfolio allocation and for monitoring equity driven transmission during periods of elevated policy uncertainty.