The impact of climate policy on U.S. environmentally friendly firms: A firm-level examination of stock return, volatility, volume, and connectedness

Abstract

This paper investigates the green stock market reaction to climate policy events associated with the Paris Agreement and the U.S. presidential elections. We document abnormal returns, volatility and volume reactions to climate policy events among green stocks. However, the magnitude of the reactions varies between the tightening and loosening of climate policy and across subgroups of the green stock markets. Our connectedness analysis further investigates the spillover patterns among individual green stocks and confirms their heterogeneous natures when responding to the occurrence of these climate policy events. By constructing a minimum connectedness portfolio based on the estimated connectedness among these green stocks, we find that investors can substantially reduce their risks. Our findings have strong implications for policy makers in designing policies to effectively promote green investments and mitigate climate change.