Climate policy uncertainty and trading behavior: Evidence from aggregate herd behavior

Abstract

Concerns of climate change influence trading behavior in the U.S. equity market. We investigate the effect of climate policy uncertainty on market-wide herd behavior. Both information and noise of climate-related issues decomposed by employing the Fama and French's three factors model are key drivers of spurious and intentional herding, respectively, in which spurious herding is existent in all cases. The role of climate policy uncertainty on herding is strongest during extremely drought days and after the Paris Agreement, showing severe herd behavior. Our results call attention to firms for incorporating climate risk for their decision makings, as well as regulators and policymakers to design appropriate practices for climate risk exposure of companies.