Does climate policy uncertainty shape the response of stock markets to oil price changes? Evidence from GCC stock markets

This paper investigates how climate policy uncertainty (CPU) drives the sensitivity of Gulf Cooperation Council (GCC) countries' stock markets to oil price changes. Based on a sample of monthly observations from 2008 to 2022, it appears that CPU negatively moderates the link between lagged oil price changes and subsequent GCC stock market returns. Interestingly, the impact of CPU on the oil-stock relationship is non-linear. Specifically, results show that the negative moderating impact of CPU is much stronger for high-CPU values, to the point that the net marginal effect of lagged crude oil returns on stock market returns becomes negative for CPU values in the higher quantiles of the distribution. These findings indicate that increases in CPU decorrelates GCC stock returns from oil price changes while decreases in CPU tend to strengthen the link between oil prices and GCC stock returns. Additionally, seemingly-related regressions analysis for individual GCC countries shows that the negative moderating role of CPU is confirmed in all countries, with the exception of Qatar. Overall, this paper's findings question the ability of GCC stock markets to provide an effective hedge against increasing global climate policy risks.