International Political Uncertainty and Climate Risk Premium

Abstract

This paper investigates how political uncertainty affects firms’ climate risk premium from a global point of view. We use the presidential election events in the United States as well as that from all countries with a stock market as proxies for political uncertainty. We find that the global stock markets respond significantly to political uncertainty induced by the U.S. presidential elections, but not so for elections from their home countries. Although we do not observe a significant change in return premium for firms with different level of climate risk during the periods of political uncertainty, we find that firms with higher climate risk experience much higher return volatility and return correlation amid uncertainty associated with U.S. elections. The results are consistent with the literature that U.S. presidential election is a better indicator of international political uncertainty. At the same time, we uncover the new evidence on how political uncertainty affects the riskiness of firms with high exposure to climate risk.

Keywords: International political uncertainty; Elections; Climate change exposure; Climate risk premium.

JEL Classification: G12, G15, G32.