Can climate change attention predict energy stock returns?

Area of Science:

• Environmental Economics
• Financial Markets
• Behavioral Finance

Background:

• Investor attention is increasingly recognized as a factor influencing financial markets.
• Traditional macroeconomic indicators may not fully capture all market dynamics.
• The growing public concern about climate change could impact investment decisions.

Purpose of the Study:

• To develop a Climate Change Attention (CCA) index using Google search volume data.
• To assess the predictive power of the CCA index for energy stock returns.
• To compare the CCA index's performance against traditional macroeconomic predictors.

Main Methods:

• Constructed a CCA index from Google Search Volume Index (GSVI) data (2004-2021).
• Employed Principal Component Analysis (PCA) for index extraction, with comparable results from equal-weighting.
• Utilized bivariate and multivariate predictive models to test the CCA index's forecasting ability.

Main Results:

• The CCA index is a statistically significant negative predictor of next month's energy stock returns.
• CCA outperforms 14 traditional macroeconomic predictors, offering complementary information.
• The predictive power of CCA is particularly strong during economic depressions and market downturns.

Conclusions:

• Investor attention to climate change contains valuable predictive information for energy stock excess returns.
• The CCA index provides significant economic gains for mean-variance investors.
• Climate change awareness is a relevant factor for understanding and forecasting energy market performance.