Climate Risk Pricing and Policy Credibility: Evidence from the 2016 and 2024 U.S. Presidential Elections

Abstract

This study examines how financial markets responded to environmentally responsible firms following the unexpected outcomes of the 2016 and 2024 U.S. presidential elections. Through an event study analysis of Russell 3000 companies, I test whether the “boomerang hypothesis” documented after Trump’s 2016 victory – when climate-responsible firms surprisingly earned positive returns despite anticipated regulatory rollbacks – held true again in 2024. The results show a dramatic shift in market behavior. While environmentally responsible companies gained 1.14 p.p. in abnormal returns after the 2016 election, similarly positioned firms lost between 1.65 and 2.52 p.p. following the 2024 election across different time windows, representing a swing of more than 3 percentage points. The findings reveal that the boomerang effect has broken down, suggesting that environmental risk pricing depends on evolving contextual factors rather than stable relationships. This complete reversal challenges assumptions about consistent market support for environmental investments and demonstrates that climate policy effectiveness depends not only on specific measures but also on broader market conditions and investor expectations about long-term policy trajectories.