Co-movements between Renewable Energy, Oil & Gas, and Technology in Europe: Implications for Investment Decisions

Abstract: In this study, the relationship between the returns of stock indices for renewable energy, oil & gas and technology is analysed in a European context with the use of a DCC GARCH model. Results show that conditional correlations peaked during four years following the 2008 financial crisis but has since then reverted to pre-crisis levels. Hedge ratios imply that renewable energy stocks can be shorted with circa 50 cents to hedge a 1$ long position in oil & gas or technology stocks and risk minimizing portfolio weights are generally low for renewable energy stocks. Portfolios that combine renewable energy stocks with technology stocks perform better than portfolios that do not according to Sharpe ratios.