The Energy Transition: The Behavior of Renewable Energy Stock During Times of Energy Security Uncertainty : A firm-specific study of the volatility characteristics, crucial drivers & uncertainties of renewable energy stock

Abstract: The global energy sector is experiencing an transition towards renewable energy, a transition that is mainly driven by issues related to climate change and energy security. In this paper, we investigate the time-varying volatility and risk measures of renewable energy and traditional energy firms. Further, we examine how uncertainty and potential drivers connected to energy security affect the volatilities and returns of renewable energy stocks. By applying the MS- GARCH (1,1) and MS-GJR-GARCH (1,1) approach we calculate the Value at Risk (VaR) and Conditional Value-at Risk (CvaR). We estimate a fixed effects model to determine the impact of the uncertainty variables on the estimated conditional volatility and returns. We contribute to the existing literature by providing a microeconomic perspective on the effects of the transition and by examining the influence of green metal prices. Contrary to previous research our findings indicate that economic policy uncertainty has a positive impact on the returns of renewable stocks. Possibly marking a shift caused by increased engagement towards a renewable transition where the attention from both governments and financial institutions mitigates the negative effects of the uncertainty that previously affected the energy sector. However, the prices of crucial green metals were found to have a negative impact on renewable stocks suggesting that the transition to renewable energy might impose implications regarding energy security if not managed correctly. The main policy implications are that beneficial policies aimed at the green sector should be continued and consistent in order to assist renewable firms during their vulnerable development phase, encourage investment into the sector and speed up the ongoing transition. Further, policies aimed toward ensuring sustainable extraction of green metals and diversifying the sources are needed in order to mitigate the new challenges regarding energy security that the transition might impose.