DYNAMIC RELATIONSHIP BETWEEN ALTERNATIVE ENERGY COMPANIES’ STOCKS PRICES AND OIL PRICES

Abstract

The topic of climate change is not new to finance. However, the scientific literature on the dynamic relationships between more traditional fossil fuels and new alternative energy source is still scarce. As these new and more sustainable energy sources are becoming more and more viable investment opportunities, it is vital to understand the factors influencing their pricing and price movements. The traditional view of the relationship between oil prices and the stock prices of alternative energy companies has been that as the price of oil increases investors move from oil to other more sustainable energy sources driving up the prices of alternative energy stocks. This thesis investigates the dynamic relationship between crude oil and alternative energy companies’ stocks. A five-variable vector autoregression and vector error correction models are created and estimated to understand the dynamics between crude oil prices, alternative energy companies’ stock prices, natural gas prices, technology companies’ stock prices and the S&P500. Focus of this thesis is set on the time before, during and after the global financial crisis to investigate whether the relationship has changed in the time after the crisis of 2007-2009. This thesis expands the work done on the subject by looking at a broader time span. The results of this thesis show that while crude oil was a good estimator of alternative energy companies’ stock prices the dynamics have changed after the crisis. The results in this thesis could be of great interest to investors and policy makers alike.