Environmental and Financial Issues in MENA
Paper Session
Sunday, Jan. 9, 2022 12:15 PM - 2:15 PM (EST)
- Chair: Jeffrey B. Nugent, University of Southern California
Convergence in Carbon Emissions and Converge Clubs
Abstract
Paris Agreement (2016) brought 196 countries together under an international intention to limit global warming. Currently (April 2021), 192 parties submitted their first long-term trajectories to take action against climate change known as nationally determined contributions (NDCs). The agreement does not put forward a direct action plan but rather leave it to the parties. The agreement is successful in achieving the ultimate aim of creating awareness and setting global and local barriers against emissions. The domestic policies to comply with this supranational agreement to mitigate emissions create new economic challenges hence, NDCs, i.e., emission reduction aims, and the realizations vary from party to party. In such an environment, this paper analyzes whether there is a convergence in the emissions globally, regionally and according to income levels. The latter condition is worth highlighting considering the special cases such as Turkey as the only G20 member that has not ratified the agreement under the argument that is listed as Annex I country, i.e., industrialized country, whereas it is supposed to be listed as a developing country. Last but not least, Phillips and Sul (2009) methodology is used to detect convergence clubs, i.e., sub country-groups that converge to different steady states.Oil Beta Uncertainty and Global Stock Returns
Abstract
This paper examines the investment implications of the uncertainty surrounding oil betas for global stock returns. Using stock market index data for 88 countries, we find that oil beta uncertainty, measured by the total range spanned by the 95% confidence interval for estimated oil betas, carries a significant risk premium, both economically and statistically. Stock markets with higher oil beta uncertainty outperform those with lower oil beta uncertainty by a monthly spread of 0.81% that is robust even after controlling for global systematic risk factors. While most developed stock markets including Australia, Canada, Switzerland, the US and the UK consistently place in the low oil beta uncertainty portfolio, emerging stock markets including Turkey, China, Egypt, Pakistan and Vietnam are found to be consistently exposed to higher oil beta uncertainty. We show that the risk premium associated with oil beta uncertainty cannot be explained by the stock market’s exposure to market beta, oil beta or idiosyncratic volatility and is stronger during high volatility periods, bullish market states as well as periods of favorable economic conditions. Further analysis suggests that the oil beta uncertainty strategy of buying (selling) high (low) oil beta uncertainty stocks yields significant risk-adjusted returns as well, after controlling for global systematic risk factors. We argue that oil beta uncertainty serves as a proxy for disagreement on the sensitivity of global stock markets’ response to global economic conditions captured by oil market exposures, which in turn contributes to a risk premium associated with oil beta uncertainty. The findings present a new channel in which oil market uncertainty drives the cross-section of global stock market returns and imply that oil beta uncertainty can be used in global investment strategies to generate risk-adjusted returns that cannot be explained by global systematic risk factors.JEL Classifications
- Q5 - Environmental Economics
- G2 - Financial Institutions and Services