Forecasting Equity Premium in the Face of Climate Policy Uncertainty

Hyder Ali and Salma Naz

Journal of Forecasting, 2025, vol. 44, issue 2, 513-546

Abstract: This study examines the role of the US climate policy uncertainty (CPU) index in forecasting the equity premium, employing shrinkage methods such as LASSO and elastic net (ENet) to dynamically select predictors from a dataset spanning April 1987 to December 2022. Alongside CPU, other uncertainty predictors like economic policy uncertainty (EPU), geopolitical risk (GPR), and the volatility index (VIX) are considered to assess their complementary roles in out‐of‐sample (OOS) equity premium forecasting. The results reveal that while CPU alone cannot consistently predict the equity premium, it provides crucial complementary information when combined with other predictors, leading to a statistically significant OOS R2$$ {R}^2 $$ of 1.231%. The relationship between CPU and the equity premium is time varying, with a stronger influence observed during periods of economic downturn or heightened uncertainty, as demonstrated by wavelet coherence analysis. This study also identifies CPU's significant impact on industry‐specific returns, particularly in climate‐sensitive sectors, offering valuable insights for investment strategies and risk management in an era of increasing CPU.

Date: 2025
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1002/for.3206

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:jforec:v:44:y:2025:i:2:p:513-546

Access Statistics for this article

Journal of Forecasting is currently edited by Derek W. Bunn

More articles in Journal of Forecasting from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().