Spillovers to Renewable Energy Stocks in the US and Europe: Are They Different?

Abstract

This paper examines the spillovers of return and volatility transmitted from fossil energies (crude oil and natural gas) and several important financial variables (stock market index, bonds, and the volatility index) to renewable stock markets in the US and Europe under the time-frequency domain frameworks. The total spillovers of return and volatility from all variables to renewable stock markets in the US are higher than those in Europe. Stock markets transmit the highest return spillovers to renewable energy stocks, which far exceed the spillovers from fossil energy to renewable energy stocks in both regions. In addition, both return and volatility spillovers could be enhanced, possibly due to specific events or sudden changes in prices. In particular, extreme events such as the Brexit referendum in 2016 influenced mostly the volatility spillovers across European markets. Moreover, the spillovers of return and volatility are contingent on frequency, and most return spillovers are concentrated at the high frequency, whereas most volatility spillovers are concentrated at the low frequency. These results remind investors that it is necessary to consider the investment horizon when making their financial decisions on renewable energy investment.

A Bayesian Entropy Approach to Sectoral Systemic Risk Modeling

“…Despite the fact that a wider horizon has a smoothing effect on the results, they manifest a high degree of similarity to the baseline specification. We notice that the overall spillover index is generally higher in turbulent times, which is in line with the findings of studies such as: Andrada-Félix et al [ 21 ], Chau and Deesomsak [ 23 ], Chatziantoniou et al [ 32 ], Liu and Hamori [ 33 ], Barunik et al [ 51 ], Demirer et al [ 52 ], and Marfatia et al [ 53 ].…”

“…Many authors investigate financial market sectoral connectedness [ 21 , 30 , 31 , 32 , 33 ]. For example, Chatziantoniou et al [ 32 ] find that financials, industry or basic materials are net risk transmitters, while IT, consumer goods, healthcare or telecommunications receive most of the risk.…”

Crude oil market and stock markets during the COVID-19 pandemic: Evidence from the US, Japan, and Germany

“…Because volatility is generated after a return, volatility needs more time to transmit from one market to another market. Liu and Hamori (2020) investigated the return and volatility spillover effect transmitted from fossil energies, in terms of several important financial variables, to renewable stock markets, and they also found that most of the return spillover effect concentrates at a high frequency (in the short term), but most volatility spillovers are developed at a low frequency (in the long term).…”

“…To obtain the dynamic results of return and volatility, we also employed the moving window method in terms of the time domain approach and the method based on frequency dynamics. Liu and Hamori (2020) used the rolling analysis method to check the dynamic results of return and volatility spillover among renewable energy stocks between the US and Europe. Zhang and Wang (2014) also applied rolling samples to better understand and capture the return and volatility spillover effects in the dynamic relationship between the Chinese and global oil markets.…”

The impact of economic uncertainty caused by COVID-19 on renewable energy stocks

“…Economic uncertainty has a significant impact on renewable energy markets, as observed in several previous studies (Dutta 2017 ; Ahmad and Rais 2018 ; Uddin et al 2019 ). Liu and Hamori ( 2020 ) analyzed the relationship between financial uncertainty and renewable energy stocks. Ji et al ( 2018 ) illustrated the impact of financial uncertainty on clean energy stocks using time-varying copulas.…”