The Impact of the El Nino-Southern Oscillation on U.S. and European Renewable Energy Stock Markets

Abstract

Although the El Ni渃̀o – Southern Oscillation (ENSO) is one of the most important climate phenomena on Earth, little has been done to explore the effect of ENSO on renewable energy stock markets. This paper contributes to the literature by being the first empirical paper to document the effect of ENSO on the volatility of renewable stocks, as well as explore the heterogeneity across different renewable energy sub-sectors (i.e., wind, solar, geothermal, and fuel cell energy, as well as the manufacturing sector for renewable energy power plants). OLS results show that no significant relationship exists between ENSO and renewable energy stock returns; however, La Ni渃̀a has a significant first-order effect on the volatility of the U.S. and European aggregate renewable energy markets, as well as the majority of sub-sector stocks. Furthermore, logit results show that increases in the intensity of La Ni渃̀a increase the downside risk of the U.S. and European aggregate renewable energy markets, as well as all sub-sector stocks except for solar energy. VAR analysis suggest that a La Ni渃̀a shock impacts the aggregate renewables market for several months. This is also true for wind energy, but is contained to an immediate effect for the remaining subsectors. These findings can be used by investors to hedge against climate risk and by policy makers to inform decisions about investing in renewables.