Explosiveness in the renewable energy equity sector: International evidence

Abstract

This paper investigates episodes of explosiveness in the renewable energy equity sectors of the three major economic regions, namely the U.S., China, and Europe, as well as the degree of connectedness between these regional renewable energy sectors and their respective broader stock markets. To this end, the novel methodology developed by Phillips and Shi (2019) is employed in conjunction with the robust bootstrap procedure of Phillips and Shi (2020). Furthermore, the connectedness framework of Diebold and Yilmaz, 2012, Diebold and Yilmaz, 2014 is used to assess return connectedness. The empirical results reveal significant episodes of explosiveness within the renewable energy sectors across the three regions. The principal period of explosivity began in late 2020 within U.S. and European renewable energy stocks, following the initial COVID-19 pandemic wave, and subsequently spread to Chinese renewable energy stocks. However, there is limited co-explosivity between the renewable energy sectors and broader stock markets, indicating that the explosive dynamics in renewable energy equities do not pose a systemic threat for the general stock markets. Additionally, the study reveals a decrease in connectedness between the regional renewable energy sectors and their broader market counterparts during the recent explosive periods, likely reflecting the decoupling of renewable energy stocks from general market trends during the latter stages of the renewable energy bubble.