The effect of climate policy uncertainty and induced risks on US aggregate and sectoral stock returns

This study examines the change in climate policy uncertainty (Delta CPU) on U.S. stock returns. Evidence shows that Delta CPU and its lagged value present a positive effect in energy (and sometimes the utility) sector; however, there is a negative effect that exhibits in aggregate and other sectoral stock returns as investors discount the future income streams, costs of carbon and damages on the valuation of stocks. The Delta CPU on stock return and volatility further generate adverse effects on stock returns. Similarly, uncertainties from energy and environmental policy change, geopolitical risk, financial crises and COVID-19 negatively affect stock returns.