The impact of greenhouse gas risks on stock market returns: an application on G7 countries

Abstract

This study investigates the impact of greenhouse gas risks on stock market returns. While carbon dioxide, methane, and nitrogen gas emissions are taken as greenhouse gases; the stock market benchmark indices of the G7 countries, which are defined as the seven most developed countries in the world, are taken as the basis for the stock market. Due to data limitations, the scope of the current study has been set as the 2000-2020 time period and the panel data analysis method has been applied. In this study, endogeneity and multicollinearity problems, cross-sectional dependence, and homogeneity/heterogeneity tests are tested respectively, and the model is estimated by performing unit root analysis in line with the findings obtained. The results of the analyses indicate that there are no endogeneity and multicollinearity problems among the variables used in the study, there is cross-sectional dependence, the variables are stationary at level I(0), there are problems of autocorrelation in the panel and it is appropriate to estimate the model with the fixed effects model. As a result of the estimation with the robust model estimator that solves the problem of autocorrelation, it is found that carbon dioxide and methane have a negative effect on stock market return, while nitrogen gas has a positive effect on stock market return. These findings suggest that investors reflect their concerns about climate change to stock markets through greenhouse gas emissions.