International political uncertainty and climate risk in the stock market

This paper investigates how political uncertainty interacts with an international firm’s climate risk in affecting the stock market. Using firms from 34 countries, we employ the presidential election events in the United States and those in other countries that have stock markets as a proxy for political uncertainty. We find that the global stock markets respond significantly to political uncertainty induced by the U.S. presidential elections but not to elections in their home countries. Although we observe a marginally significant change in stock return for firms with different levels of climate risk during periods of political uncertainty, we find that firms with high climate risk experience high return volatility and return correlation amid uncertainty associated with U.S. presidential elections. The results are consistent with literature that indicates U.S. presidential election is an indicator of international political uncertainty. Further, we present new evidence on how political uncertainty affects the riskiness of firms with high exposure to climate risk.