International Political Uncertainty and Climate Risk Premium

38 Pages Posted: 6 Jun 2022 Last revised: 16 Jan 2024

See all articles by Xu Gong

Xu Gong

Xiamen University

Chengbo Fu

University of Northern British Columbia - School of Business

Qiping Huang

University of Dayton

Meimei Lin

Georgia Southern University

Date Written: April 11, 2022

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.

Suggested Citation

Gong, Xu and Fu, Chengbo and Huang, Qiping and Lin, Meimei, International Political Uncertainty and Climate Risk Premium (April 11, 2022). Journal of International Financial Markets, Institutions and Money, Vol. 81, No. 101683, 2022, Available at SSRN: https://ssrn.com/abstract=4122678 or http://dx.doi.org/10.2139/ssrn.4122678

Xu Gong

Xiamen University ( email )

Xiamen, Fujian 361005
China

Chengbo Fu (Contact Author)

University of Northern British Columbia - School of Business ( email )

Prince George, BC, V2N 4Z9
Canada

Qiping Huang

University of Dayton ( email )

300 College Park
Datyon, OH OH 45419
United States

Meimei Lin

Georgia Southern University ( email )

P.O. Box 8151
Statesboro, GA 30460-8151
United States

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