Dynamic dependence between clean investments and economic policy uncertainty

in: UNU-MERIT Working Paper Series 2022-027, Maastricht, United Nations University

Open access

This paper examines how clean investments across different sectors respond to economic policy uncertainty (EPU) using the NASDAQ OMX Green Economy sectoral Indexes. We rely on Wavelets and the Cross-quantilogram techniques to examine the dependence and directional predictability from EPU to each sector's clean energy stock prices. Our results highlight evidence in support of strong heterogeneous dependence and directional predictability of sectoral clean energy returns from EPU across different market conditions and investment horizons. Second, we employ the Time- Varying Parameter-VAR (TVP-VAR) model with stochastic volatility to characterize the level of integration between clean energy sectors and EPU under different investment horizons. We find that the level of connectedness is weak in the short-term but becomes stronger in the medium- and long-term. Nonetheless, we distill some important heterogeneities in the predictive power of EPU for the different sectors across different investment horizons. Taken together, our results demonstrate that the direction and magnitude of the response of clean energy stock prices to EPU vary across sectors and depend on market conditions and horizons. This offers diversification benefits to investors and portfolio managers that may be interested in clean energy stocks across sectors, market conditions, and horizons.