Pricing behavior of clean energy stocks? Some trading implications

Abstract

Mispricing and price adjustment to shocks are common features of stocks, which arise due to various types of shocks. Understanding mispricing and price adjustment mechanism can guide trading strategy design. Our hypothesis is that clean energy stocks are characterised by mispricing and that there are unique stocks in the sense that they move first when exposed to shocks. We employ a price discovery model to rank clean energy stock indices in terms of those that adjust to prices faster than those that do not. We then identify mispricing in those stocks using a market risk factor model. Utilizing time-series data on 11 clean energy stock indices, we propose eight trading strategies, and show that they offer annualized returns in the −5.37% to 61.10% range. Six of the eight strategies offer profits close to 15% or more, beating the buy and hold strategy. Trading strategies devised on mispricing suggest that two of the clean energy stocks can potentially beat the buy-and-hold strategy, offering annualized returns in excess of 13%. Because our results guide investors towards making profits from trading clean energy stocks, the implication is that the trading strategies can enhance the green finance market.