Abstract
Clean energy firms are among the most risky firms to invest in. Hence, it is essential to have a clear understanding of the risk profile of clean energy stocks. The main purpose of this study is to examine how changes in the reserve currency (US dollar) value affect the volatility of clean energy stocks in the absence/presence of uncertainty information. To this end, the volatility of clean energy stocks is first obtained by considering uncertainty information in the exponential generalized autoregressive conditional heteroskedastic (EGARCH) volatility estimates. Then, using the autoregressive distributed lag (ARDL) model, this study investigates the effect of reserve currency (US dollar) value fluctuations on the volatility of clean energy stocks. Controlling for monetary conditions, financial stress, and business cycle fluctuations, the study finds that, in the absence of uncertainty information, the volatility of clean energy stocks is not influenced by US dollar fluctuations. However, an appreciation of the US dollar against major foreign currencies significantly increases the volatility of clean energy stocks when uncertainties about economic policy, exchange rate market, and gold market are included in the picture. We find that economic uncertainty mediates the link between reserve currency and the volatility of clean energy stocks. The results shed more light on the risk profile of clean energy stocks and suggest the need for predictable and stable policies to increase the attractiveness of clean energy stocks.
Highlights
Macroeconomic and financial risks arising from the volatility in oil prices have significant adverse effects on global markets (Brown and Yucel, 1999; Jones and Kaul, 1996; Darby, 1982)
The main purpose of this study is to examine how changes in the reserve currency (US dollar) value affect the volatility of clean energy stocks in the absence/presence of uncertainty information
This study investigates how the dynamic link between reserve currency (US dollar) and volatility of clean energy stocks varies depending on uncertainty about major markets and economic policy, controlling for financial stress, monetary conditions, and business cy cles
Summary
Macroeconomic and financial risks arising from the volatility in oil prices have significant adverse effects on global markets (Brown and Yucel, 1999; Jones and Kaul, 1996; Darby, 1982). In periods when the level of macroeconomic uncertainty is extremely high (such as recessionary periods), the volatility of risky assets (e.g. clean energy stocks) traded in stock markets considerably increases (Bloom, 2014). Uncertainty in global markets might have adverse effects on the volatility of risky clean energy stocks. The second sub-section explains the reasons why uncertainty about the major markets and economic policy could include important informa tion on the volatility of clean energy stocks. Reboredo (2015) utilizes copulas and demonstrates the significant contribution of change in oil prices to the upside and downside risks of clean energy firms. Utilizing the threshold co-integration methods developed by Hatemi-j (2008) and Gregory and Hansen (1996), Bondia et al (2016)
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