Does climate policy uncertainty predict renewable energy stocks? A quantile-based (a)symmetric causality analysis

Abstract

The identification of factors influencing the renewable energy stock market has recently received much attention from scholars. While the implications of economic policy uncertainty on renewable energy stock markets have been extensively studied in recent literature, less attention has been paid to climate policy uncertainty. This study adds to the existing body of knowledge by investigating whether the U.S. climate policy uncertainty predicts the return and volatility of five NASDAQ OMX Green Economy indices (fuel cell, wind, solar, developer/operator, and geothermal). The analysis is based on the nonparametric causality-in-quantile test and employs data from November 2010 to August 2022. The findings provide strong evidence of heterogeneous distributional predictability of climate policy uncertainty on the return and volatility of renewable energy stocks, which depends on the renewable energy sector and the market condition. More specifically, climate policy uncertainty does not cause stock returns during extreme downward and/or upward renewable energy market conditions. Additionally, uncertainty cannot predict volatility during the turmoil episodes that occurred in the renewable energy stock market. Further in-depth analysis considering the asymmetry reveals that a decrease (increase) in climate policy uncertainty improves the prediction of renewable energy stock returns (volatility) instead of a decrease (increase). These findings still hold when using a parametric causality-in-quantile test. The findings underscore the critical role of climate policy transparency and sector-specific strategies in reducing uncertainty and encouraging long-term investments in the renewable energy sector.