On the dynamic interdependence between risk factors and clean energy stock prices

Abstract

The growing challenges posed by climate change have made the shift to clean energy an urgent necessity for sustainable development. However, the clean energy sector is deeply intertwined with broader risk factors that can significantly impact its growth and stability. In this study, we investigate the complex dynamics between clean energy stock markets and five key US risk factors: climate policy uncertainty, economic policy uncertainty, financial stress, geopolitical risk, and oil price volatility. Our analysis uses the novel quantile-on-quantile connectedness approach, which enables a deeper exploration of the interdependencies between variables not only within the same quantiles but also across various quantiles of their respective distributions. We find substantial inverse connectedness, particularly under extreme market circumstances, underscoring the vulnerability of clean energy stocks to changes in policy uncertainty, financial stress, and oil prices. Geopolitical risk, meanwhile, exhibits a strong direct relationship with clean energy markets, especially in times of heightened geopolitical tension. Additionally, the pairwise connectedness structure tends to intensify throughout paramount political, economic, and climate events or crises. Our findings have practical implications for both investors and policymakers.