The relationship between Renewable Energy, Electricity Prices and the Stock Market : A study on the relation between electricity prices and stock markets in chosen European countries with different energy sources

Abstract: In this study we analyse the relationship between renewable energy, electricity prices, and the stock market. The impact from electricity prices on stock markets have previously been thoroughly analysed. However, our study evaluates if a country’s share of renewable energy in their electricity production impacts the strength and size of the relationship in question. We use data from eight countries of rather equal economical sizes but that uses very opposed energy sources. Sweden, Norway, Finland, and Latvia represent countries with high amounts of renewable energy. While Belgium, Netherlands, Poland, and Hungary constitute countries with low shares of renewable energy. By using daily data between January 2016 and December 2021, we aim to understand the relationship of electricity prices and stock market indices and the role of renewable energy in this relationship. We do this by using Johansen’s cointegration test as well as analysing the correlation between volatilities through a DCC-GARCH(1,1). We find that both tests indicate a negative correlation between the electricity and stock markets as well as for their volatilities. In addition, we find some disparities between countries depending on their share of renewable energy. The impact of electricity prices on the stock market tends to be more pronounced for countries that use larger shares of renewable energy. Finally, findings suggest that the energy source used for electricity production also constitute an important factor in the connectivity of the markets. Wind power was found to be the main cause to the larger fluctuations on the electricity market leading to stronger relationship to the stock market. While hydro power is the more stable option of renewable energy with smaller variances and large storage capacity, weakening the link between the electricity market and stock market.