When President Barack Obama in May 2009 rolled out stiff new national fuel consumption standards for vehicles sold in the United States, the rules mandated an increase in fuel efficiency by an average of 5 percent annually between 2012 and 2016 to help reduce greenhouse gas emissions. The policy “provides the clear certainty” to allow automakers and oil companies to plan for the future, Obama said.
As the president was speaking, the share prices of oil companies rallied. It was a dramatic example of how White House communications on climate policy can affect asset prices, according to Washington University in St. Louis’s William Cassidy, a recent graduate of Booth’s PhD Program. Presidential pronouncements tend to reduce the uncertainty and volatility of climate-related stocks and bolster their value, his research demonstrates.
The findings highlight the political dimensions of climate-change announcements, and how those dimensions affect asset markets.
Cassidy built a data set of presidential policy announcements related to climate initiatives going back to 2001, the first year of the George W. Bush administration. He merged that information with minute-by-minute trade and quote data on 8,000 US stocks.
Analyzing how the market responded to the policy announcements by Presidents Bush, Obama, Donald Trump, and Joe Biden, Cassidy calculated the direct impact that White House policy communications had on asset prices.
Investors who bought VIX futures right before presidential announcements on climate initiatives, betting that the US stock market would become more volatile, instead saw returns decline. This suggests the announcements resolved policy uncertainty by revealing information to market participants. Nearly identical trading strategies outside the announcement window did not see a similar decline.
Presidential pronouncements were associated with systematic declines in the CBOE Volatility Index, he finds. Commonly known as the stock market’s “fear gauge,” the VIX signals volatility based on S&P 500 options, and the decreases suggest that the announcements calmed markets.
“These announcements are periods when a significant amount of information is revealed to market participants—[so that] policy uncertainty is resolved,” Cassidy writes. He finds that the effect of climate-related comments on the VIX was about seven times as large as the impact of any ordinary presidential policy announcement.
Cassidy also analyzed the response of “brown-minus-green” stock portfolios. These take long positions in “brown” stocks, or shares of companies that might be hurt by climate regulations (think oil and coal producers), as well as short positions in “green” stocks (such as solar-panel or wind-generator makers). These portfolios are designed to gauge the climate-policy risk premium associated with brown stocks compared with green stocks.
Over the course of presidential climate-policy discussions, there were strong positive returns, he finds. Uncertainty tended to depress brown stocks in advance of policy announcements. As a president clarified policy plans and resolved the uncertainty, a kind of relief rally took hold when proposed changes turned out to be less stringent than feared—or at least more manageable, the research suggests.
The data also reveal a significant relationship between the approval rating of a president making a climate announcement and the magnitude of the decline in the VIX. “When policy makers are more popular, they are more willing to inform voters about their future climate-policy actions,” says Cassidy. “Investors incorporate this information into their forecasts of future profitability.”
Politicians are quite sensitive to the political risks associated with climate-change action because major initiatives may cause a backlash, Cassidy argues. To minimize these risks, politicians reveal their planned policies carefully—but the incentives that may lead them to obscure or misrepresent their intentions can also lead to uncertainty.
William Cassidy, “Elections Have Consequences: The Impact of Political Agency on Climate Policy and Asset Prices,” Working paper, January 2023.
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