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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:

    1. Angelidis, Timotheos & Sakkas, Athanasios & Spiliotopoulos, George, 2023. "Climate uncertainty and marginal climate capital needs," Finance Research Letters, Elsevier, vol. 56(C).
    2. 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).

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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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