Testing the Diversifying Asset Hypothesis between Clean Energy Stock Indices and Oil Price

Abstract

In theory, geopolitical risk and political uncertainty can directly affect energy markets. Fluctuations lead to the cost of clean energy sources as they compete with traditional energy. The purpose of this study is to analyse financial integration and test the diversifying asset hypothesis between clean energy indices, specifically the Clean Energy Fuels (CLNE), Nasdaq Clean Edge Green Energy (CELS), S&P Global Clean Energy (SPGTCLEN), TISDALE Clean Energy (TCEC.CN), Wilderhill (ECO) and West Texas Intermediate (WTI) stock indices, over the period from 1 January 2018 to 23 November 2023. Analysing the results reveals a scenario where most of the clean energy indices show cointegration with each other, indicating long-term relationships that reflect common trends in the clean energy sector. However, the relative independence of the WTI suggests that Oil still acts as an important and potentially diversifying external factor for investors focused on sustainable energy. Structural breaks in 2021 and 2022 in several indices point to significant events that have altered market dynamics, possibly including changes in environmental policies, technological innovations and the impacts of the COVID-19 pandemic. The cointegration evidence and structural breaks provide valuable information for building investment portfolios. Investors can consider the WTI to diversify portfolios dominated by clean energy assets, taking advantage of Oil’s relative independence. On the other hand, the high correlation between clean energy indices suggests that, within this sector, diversification options are more limited, requiring careful analysis of the specific characteristics of each index and the macroeconomic forces affecting them.