Connectedness and risk spillovers between crude oil and clean energy stock markets

Abstract

This research investigates the relationship between clean energy stock and oil market returns utilizing Granger predictability in distribution and quantile impulse response analysis. We find that clean energy stock returns Granger predict oil price returns during “normal times” based on the distribution’s center, but not vice versa. During bullish market episodes, there is bidirectional Granger predictability between the returns of clean energy stocks and oil market returns. Nonetheless, we find that clean energy stock returns Granger predict oil returns in bearish markets without any evidence of the contrary. This indicates that oil returns cannot be used to hedge the downside risk associated with renewable energy company purchases. Quantile impulse responses for the relationship between clean energy stocks and the crude oil market reveal bidirectional and significant responses, where a negative shock during an extremely down market reveals a negative response in the other market and a positive shock during an extremely up market reveals a significant positive response. This shows that neither market can be utilized to offset risks in the other market.