Alternative monetary policies and renewable energy stock returns

Abstract

The aim of this study is to determine how monetary policy interacts with the financial sector specialising in renewable energy, especially since the implementation of Quantitative Easing (QE). Using EU data and the VAR approach incorporating the interest rate, representing monetary policy, an index of renewable energy stock prices, oil prices, technology and the VIX, this paper applies Granger causality, generalised impulse response functions and historical variance decompositions to explain this interaction. To account for the changes in monetary policy such as QE, structural break tests have been used to determine their effects on the variables, as the breaks correspond to the main QE events, the data has been divided into subsamples to reflect the possible differing effects of QE. The results suggest that monetary policy has only a limited effect overall on renewable energy stocks, as the long recent period of alternative monetary policies has been found not to influence renewable energy stock prices. More time-disaggregated analysis undertaken by incorporating structural breaks identifies a significant influence during some time periods depending on the type of monetary policy being conducted.