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Trump vs. Paris: The impact of climate policy on U.S. listed oil and gas firm returns and volatility

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  • Diaz-Rainey, Ivan
  • Gehricke, Sebastian A.
  • Roberts, Helen
  • Zhang, Renzhu

Abstract

We explore the stock market and option implied volatility response of the oil and gas industry to four policy events associated with the Paris Agreement and the election of Donald Trump. Our results show that the signing of the Paris Agreement had a large negative impact for the Oil and Gas sector (CAAR −8.4%), with Exploration and Production (CAAR −12.2%) and Drilling (CAAR −10.5%) most severely affected. This is further supported by an increase in implied volatility and by a structural break in option trader sentiment around the signing of the agreement. In general, the Paris Agreement had a much stronger impact on firms that had primarily U.S.-focused operations. Contrary to expectations, the election of Donald Trump and the announced withdrawal of the U.S. from the Paris Agreement negatively affected some sub-sectors (integrated and transport) and the sector overall. We attribute this to (1) Trump's policies supporting domestic production (benefitting unlisted independent producers at the expense of listed competitors with import and international assets), and (2) on “We Are Still In” efforts by U.S. states, cities and companies to continue to meet Paris Agreement goals. Overall, our results indicate that investors are pricing current policies when examining climate risk and that, in this respect, the Paris agreement trumped Trump.

Suggested Citation

  • Diaz-Rainey, Ivan & Gehricke, Sebastian A. & Roberts, Helen & Zhang, Renzhu, 2021. "Trump vs. Paris: The impact of climate policy on U.S. listed oil and gas firm returns and volatility," International Review of Financial Analysis, Elsevier, vol. 76(C).
    • Handle: RePEc:eee:finana:v:76:y:2021:i:c:s1057521921000880
    DOI: 10.1016/j.irfa.2021.101746
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    More about this item

    Keywords

    Climate risk; Oil and gas firms; Option implied volatility; Stranded assets valuation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • L91 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Transportation: General
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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