The Dynamic Relationship between Renewable Energy Stock Indexes and Oil Prices: The Effect of Structural Demand and Supply shocks to Oil

Abstract

I examine the effect of oil supply and demand shocks to oil on stock indexes consisting of companies in the energy sector. The main purpose is to understand whether stock indexes in the renewable energy sector are affected by changes in the underlying cause of oil price fluctuations. The newest information about shocks to supply and demand in the energy sector is utilized. By employing the Local Projection framework, I derive impulse responses showing how two renewable and two non-renewable energy indexes respond to oil supply and demand shocks. My results indicate that a supply shock leads to a small increase in the clean energy index prices in the long-run and a consumption demand shock leads to a small increase of the clean energy indexes in the short-run. Moreover, an oil inventory shock leads to a minor increase in the clean energy indexes in the intermediate run. Subsequently, renewable energy indexes consisting of global companies decreases more due to an economic activity shock than clean indexes consisting of European companies. Furthermore, non-renewable energy indexes provide a more statistically significant relationship to the oil shocks than the renewable energy indexes. This can be supported by the literature showing contradictory effects from oil shocks on renewable energy indexes. I utilize Kilian´s oil shocks in place of Baumeister and Hamilton´s to better understand whether these results solely rely business analytics on the specific oil shock data. The findings indicate that consumption demand shocks propagate similarly in the clean energy indexes regardless of the specific oil shock data employed.