The economic impact of crude oil price shocks on alternative energy stock prices

Abstract

Over the past couple of decades, rising oil prices have had a positive impact on the alternative energy industry because of the substitution effect. In a society that is growingly concerned about environmental sustainability, would this substitution effect suggest that the reciprocal could also be true; that low oil prices could be destructive to the alternative energy industry? Previous work by Henrique and Sadorsky examined the impact of oil price shocks on U.S. alternative energy stock prices through 2001 to 2007. This paper uses a similar approach to follow up their findings, in light of the 2015 oil price collapse. A vector autoregressive (VAR) model is used to investigate the relationship between multivariate time-series, including the following variables: alternative energy stock prices, crude oil prices, general stock prices, and interest rates. Granger causality tests and impulse reaction functions are examined to determine whether oil price shocks have a significant effect on alternative energy stock prices.