The rise in investors’ awareness of climate risks after the Paris Agreement and the clean energy-oil-technology prices nexus

Abstract

Investors’ awareness of climate risks and attention to green investments are on the rise especially after the Paris Agreement. It stands to reason that this rise in awareness has an impact on the connection between clean energy prices and oil and technology stock prices. In this paper, we test this hypothesis by fitting an exogenous smooth transition regression model to the cycle of clean energy with oil and technology stock prices as exogenous regime driving variables before and after the Paris Agreement. After controlling for carbon price, market volatility, and policy uncertainty, we find that oil price has a stronger asymmetric persistence on the cycle of clean energy assets pre-Paris Agreement. In the period post Paris Agreement, however, the roles are reversed. Technology stock prices are the best regime drivers for clean energy assets with strong nonlinear asymmetric persistence, and the impact of oil price is completely absent. The superiority of technology stock prices over oil price in driving the cyclical behavior of clean energy assets supports our argument that the Paris Agreement and other recent climate-related events are contributing to the decoupling of the clean energy sector from traditional energy markets. Our findings are particularly important for climate mitigation and adaptation policies.