It seems to me that for mission hedging to work, there needs to be a strong positive relationship between production and stock price. That is, when (say) a fossil fuel company produces more oil, its stock price goes up. That might happen, but it might not. Several things need to happen:
The increased quantity is not offset by a decrease in price
The increased revenue translates into higher profit (this might not happen if, e.g., increased revenue inuces more competition, or induces increased costs for the oil company)
Higher profit translates into a higher stock price
Step 3 seems very likely to happen in the long run, but steps 1 and 2 seem more uncertain to me, and I don’t have a great understanding of the relevant economics. Do we have good reason to expect increased production to translate into stock returns? Or do we at least understand the circumstances under which it will or will not translate?
(Alternatively, we could look at the relationship between, say, oil production and the price of oil futures. This is a simpler relationship, but I’d guess the two numbers are basically uncorrelated. They will move together if demand changes, and will move oppositely if supply changes.)
It seems to me that for mission hedging to work, there needs to be a strong positive relationship between production and stock price. That is, when (say) a fossil fuel company produces more oil, its stock price goes up. That might happen, but it might not. Several things need to happen:
The increased quantity is not offset by a decrease in price
The increased revenue translates into higher profit (this might not happen if, e.g., increased revenue inuces more competition, or induces increased costs for the oil company)
Higher profit translates into a higher stock price
Step 3 seems very likely to happen in the long run, but steps 1 and 2 seem more uncertain to me, and I don’t have a great understanding of the relevant economics. Do we have good reason to expect increased production to translate into stock returns? Or do we at least understand the circumstances under which it will or will not translate?
(Alternatively, we could look at the relationship between, say, oil production and the price of oil futures. This is a simpler relationship, but I’d guess the two numbers are basically uncorrelated. They will move together if demand changes, and will move oppositely if supply changes.)