Risk beyond volatility: Probing spillovers and investment strategy in the energy-carbon-stock system

Understanding spillovers within the energy-carbon-stock system is paramount, given the urgent global challenges of climate change and energy transition. While previous studies focused solely on lower-order moment spillovers, this paper investigates risk spillovers of higher moments across energy, carbon, and G7 stock markets using the TVP-VAR extended joint connectedness method and evaluates the effectiveness of incorporating these spillovers into investment strategies using the minimum connectedness framework. Empirical results show that total volatility spillovers surpass those of higher moments, that EUA futures, renewable energy, WTI oil, and natural gas markets consistently receive net spillovers while the French, German, Italian, UK, and US stock markets transmit, and that dynamic spillovers, hedge ratios, and portfolio weights vary over time and are notably affected by major crises such as COVID-19 and the Russia-Ukraine war, with the latter exerting a particularly strong influence on total kurtosis spillovers. The portfolio strategy with the lowest kurtosis spillovers outperforms others by reducing risk and enhancing cumulative returns, while geopolitical risks, climate policy uncertainty, and the EPU of France, Japan, the UK, and Canada significantly drive overall connectedness. These results carry clear practical implications: investors and portfolio managers should incorporate higher-moment spillovers when constructing portfolios and use natural gas, coal, and EUA futures as hedging instruments for G7 equity exposures, while policymakers and regulators should design coordinated frameworks that explicitly account for cross-market and higher-moment risk transmission in climate-related and macroprudential interventions.