Utilizing LASSO-VAR and frequency decomposition to analyze the climate risk contagion network: Implementing decarbonization strategies in finance

In the context of global low-carbon strategies, the climate finance system, composed of the climate finance markets and climate risks, is interconnected through volatility spillover networks. This system possesses dual attributes of finance and decarbonization, revealing the dynamic spillover characteristics of both global systemic risk and local pairwise risk. To measure the network connectedness, this paper constructs a climate finance system comprising eight climate finance markets and two climate risk sequences, applying the LASSO-VAR-BK model to analyze the static, dynamic, short-term, and long-term connectedness. The results indicate that, from a static perspective, green stock markets are the primary net spillover sources, while the green bond market, carbon emission trading markets, and climate risks are net spillover receivers. Additionally, frequency decomposition reveals heterogeneity under long-term and short-term shocks. Risk spillover is primarily short-term, whereas the long-term risk correlation is stronger in climate risk sequences. Finally, compared with many of its emerging market peers, China demonstrates a relatively more developed climate finance framework, with a delay in managing physical climate risks. Based on these findings, this paper suggests enhancing the diversity and risk-hedging capacity of climate finance markets to manage systemic risks following significant climate events, thereby advancing decarbonization strategies.