Climate policy uncertainty and the cross-section of stock returns

Sirimon Treepongkaruna, Kam Fong Chan and Ihtisham Malik

Finance Research Letters, 2023, vol. 55, issue PA

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.

Keywords: Climate policy uncertainty; Asset pricing; Cross-section of stock returns; ICAPM (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:55:y:2023:i:pa:s1544612323002106

DOI: 10.1016/j.frl.2023.103837

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