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Climate policy uncertainty and the cross-section of stock returns

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  • Treepongkaruna, Sirimon
  • Chan, Kam Fong
  • Malik, Ihtisham

Abstract

We show that climate policy uncertainty (CPU) is priced cross-sectionally in individual stocks. On average, the risk-adjusted annual future returns of stocks with low exposure to CPU are 5.5%–6.3% higher than those of stocks with high CPU exposure. This finding is consistent with Merton's (1973) intertemporal CAPM where uncertainty-averse investors are willing to pay higher prices and accept lower future returns for CPU-sensitive stocks. Low CPU-beta firms are primarily value stocks with low crash risk, and they have higher exposure under Democratic presidencies. Finally, we develop a novel CPU factor, and show that it outperforms the size and value factors.

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  • Treepongkaruna, Sirimon & Chan, Kam Fong & Malik, Ihtisham, 2023. "Climate policy uncertainty and the cross-section of stock returns," Finance Research Letters, Elsevier, vol. 55(PA).
    • Handle: RePEc:eee:finlet:v:55:y:2023:i:pa:s1544612323002106
    DOI: 10.1016/j.frl.2023.103837
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    Cited by:

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    2. Sun, Yanpeng & Song, Yuru & Long, Chi & Qin, Meng & Lobonţ, Oana-Ramona, 2023. "How to improve global environmental governance? Lessons learned from climate risk and climate policy uncertainty," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 1666-1676.
    3. Angelidis, Timotheos & Sakkas, Athanasios & Spiliotopoulos, George, 2023. "Climate uncertainty and marginal climate capital needs," Finance Research Letters, Elsevier, vol. 56(C).
    4. Silva, Florinda & Ferreira, André & Cortez, Maria Céu, 2024. "The performance of green bond portfolios under climate uncertainty: A comparative analysis with conventional and black bond portfolios," Research in International Business and Finance, Elsevier, vol. 70(PA).
    5. Zhu, Bo & Hu, Xin & Deng, Yuanyue & Zhang, Bokai & Li, Xiru, 2023. "The differential effects of climate risks on non-fossil and fossil fuel stock markets: Evidence from China," Finance Research Letters, Elsevier, vol. 55(PB).
    6. Amin, Md Ruhul & Akindayomi, Akinloye & Sarker, Md Showaib Rahman & Bhuyan, Rafiqul, 2023. "Climate policy uncertainty and corporate tax avoidance," Finance Research Letters, Elsevier, vol. 58(PD).
    7. Polat, Onur & Demirer, Riza & Ekşi, İbrahim Halil, 2024. "What drives green betas? Climate uncertainty or speculation," Finance Research Letters, Elsevier, vol. 60(C).
    8. Guillaume Pijourlet, 2024. "Climate policy uncertainty and US industry stock returns: A quantile regression approach," Economics Bulletin, AccessEcon, vol. 44(1), pages 182-189.
    9. Yang, Jinyu & Dong, Dayong & Liang, Chao, 2024. "Climate policy uncertainty and the U.S. economic cycle," Technological Forecasting and Social Change, Elsevier, vol. 202(C).
    10. Yao, Xiaoyang & He, Wenjing & Li, Jianfeng & Le, Wei, 2023. "Climate policy uncertainty through production networks: Evidence from the stock market," Economics Letters, Elsevier, vol. 233(C).
    11. Yikai Zhao & Jun Nagayasu & Xinyi Geng, 2024. "Measuring Climate Policy Uncertainty with LLMs: New Insights into Corporate Bond Credit Spreads," DSSR Discussion Papers 143, Graduate School of Economics and Management, Tohoku University.
    12. Liu, Hao & Lin, Chuyin, 2023. "Climate change news risk and corporate bond returns in China," Finance Research Letters, Elsevier, vol. 58(PC).

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    More about this item

    Keywords

    Climate policy uncertainty; Asset pricing; Cross-section of stock returns; ICAPM;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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