The Pricing Relationships between Oil and Renewable Firms under Extreme Conditions: The Effects of Negative WTI Prices (Online Appendix 2/3)

Abstract

We test for the existence of volatility spillovers and co-movements among energy-focused corporations during the outbreak of the COVID-19 pandemic, inclusive of the April 2020 events where West Texas Intermediate (WTI) oil future prices became negative. Employing the spillover index approach of Diebold and Yilmaz [2012]; as well as developing a DCC-FIGARCH conditional correlation framework and using estimated spillover indices built on a generalised vector autoregressive framework in which forecast-error variance decompositions are invariant to the variable ordering, we examine the sectoral transmission mechanisms of volatility shocks and contagion throughout the energy sector. Among several results, we find positive and economically meaningful spillovers from falling oil prices to both renewable energy and coal markets. However, this result is only found for the narrow portion of our sample surrounding the negative WTI event. We interpret our results being directly attributed to a sharp drop in global oil, gas and coal demand, rather than because of a sudden increase in oil supply. While investors observed the US fracking industry losing market share to coal, they also viewed renewables as more reliable mechanism to generate long-term, stable and low-cost supply.