The European Renewable Energy Sector in Calm and Turmoil Periods: The Key Role of Sovereign Risk

Author:

Constant Karine1,Davin Marion2,Truchis Gilles de1,Keddad Benjamin3

Affiliation:

1. University of Orléans, LEO, Orléans, France

2. CEE-M, Univ Montpellier, CNRS, INRAE, Institu Agro, Montpellier, France

3. Paris School of Business, Paris, France

Abstract

This paper explores the comparative role of sovereign default risk and several high-frequency macrofinancial indicators that may explain the drop in European renewable energy stocks observed during the 2008 financial crisis and the European debt crisis. We use a two-state time-varying transition probability Markov-switching model to investigate how they impact the bull and bear market trends of renewable stocks. Our main finding is that public financing conditions, captured by sovereign default risks, play a key role in both market regimes, while the other variables affect the renewable energy stocks only in calm or turmoil periods. Moreover, sovereign risk is identified as the main determinant of the European renewable energy stock dynamics in both regimes in the period under review. Finally, we suggest that this effect may be due to the sensitivity of investors to the energy policy uncertainty, entailed by such a pressure on public finances. JEL Classification: G01, G15, Q42

Publisher

SAGE Publications

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