Climate policy uncertainty and the stock return predictability of the oil industry

This paper uses a news-based climate policy uncertainty (CPU) proposed by Gavriilidis (2021) to test the stock return predictability of the oil industry. Results show that CPU is a strong predictor of future oil industry stock returns both in- and out-of-sample. The predictive power of CPU is informationally complementary to existing uncertainty indicators and far greater than that of other uncertainty indicators, economic variables, new predictors, and oil industry-specific predictors. Furthermore, CPU can provide sizeable economic gains to mean-variance investors. The driving force of CPU's predictive power appears to stem from its ability to predict future cash flows in the oil industry. We also explain the predictability of CPU from the perspective of oilrelated fundamentals and investor attention.

Automated summary

This paper uses a news-based climate policy uncertainty (CPU) to predict stock returns in the oil industry. The results demonstrate that CPU has a strong predictive power for future oil industry stock returns, surpassing other uncertainty indicators, economic variables, and industry-specific predictors. In addition, CPU can generate significant economic gains for mean-variance investors. The predictive power of CPU may stem from its ability to forecast future cash flows in the oil industry.