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

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

International Review of Financial Analysis, 2021, vol. 76, issue C

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.

Keywords: Climate risk; Oil and gas firms; Option implied volatility; Stranded assets valuation (search for similar items in EconPapers)
JEL-codes: G12 G13 G14 G18 L91 Q54 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (48)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:76:y:2021:i:c:s1057521921000880

DOI: 10.1016/j.irfa.2021.101746

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