Code Red For Stock Markets? An Empirical Analysis of the Norwegian Stock Market Reactions to Reports by the Intergovernmental Panel on Climate Change

Abstract

To raise awareness of the financial implications of reports published by the Intergovernmental Panel on Climate Change, this thesis examines the Norwegian stock market reactions surrounding these publications. In addition, the thesis examines the market efficiency of Oslo Stock Exchange in relation to climate change research. This thesis contributes to recent academic literature on how stock markets react to publications of climate change reports by studying 20 reports published between 2001 to 2020. The research question is answered through three hypotheses, one for each of these indices: OBX Total Return Index, OBX Energy Index, and OBX Financials Index. We apply the event study methodology explained by MacKinlay (1997) to identify if there are abnormal returns surrounding the events. We conduct several different analyses for all three hypotheses and the results are ambiguous, which makes it challenging to conclude. In the main event window, we find significant cumulative abnormal returns between -1.50% and -1.97% for the OBX Total Return Index. For the OBX Financials Index we find cumulative abnormal return of -1.25% in the main event window. Many factors in the market can contribute to these abnormal returns. Considering such factors we examine the oil price, the Norwegian policy rate, and the Paris Agreement. Including these variables indicate that an increase in the oil price or the policy rate makes the expected cumulative abnormal return less negative. This implies that there are several factors affecting the estimated cumulative abnormal returns. Surprisingly, no significant results are found in the main event window for the OBX Energy Index, which is dominated by oil and gas companies. These results indicate that there are no effects on the Norwegian energy sector in relation to climate change news. As our analyses show such varying results there is no clear violation of the efficient market hypothesis. Our findings suggest that investors in the Norwegian market perceive climate change news as relevant for investment decisions. Furthermore, there are still market reactions even though it has been 31 years since the first publication by the climate panel. Thus, climate change research is still relevant in 2021.