Reserve currency and the volatility of clean energy stocks: The role of uncertainty

Clean energy firms are among the most risky firms to invest in. Hence, it is essential to have a clear understanding of the risk profile of clean energy stocks. The main purpose of this study is to examine how changes in the reserve currency (US dollar) value affect the volatility of clean energy stocks in the absence/presence of uncertainty information. To this end, the volatility of clean energy stocks is first obtained by considering uncertainty information in the exponential generalized autoregressive conditional heteroskedastic (EGARCH) volatility estimates. Then, using the autoregressive distributed lag (ARDL) model, this study investigates the effect of reserve currency (US dollar) value fluctuations on the volatility of clean energy stocks. Controlling for monetary conditions, financial stress, and business cycle fluctuations, the study finds that, in the absence of uncertainty information, the volatility of clean energy stocks is not influenced by US dollar fluctuations. However, an appreciation of the US dollar against major foreign currencies significantly increases the volatility of clean energy stocks when uncertainties about economic policy, exchange rate market, and gold market are included in the picture. We find that economic uncertainty mediates the link between reserve currency and the volatility of clean energy stocks. The results shed more light on the risk profile of clean energy stocks and suggest the need for predictable and stable policies to increase the attractiveness of clean energy stocks.

Automated summary

Investing in clean energy firms is risky, and understanding the risk profile of clean energy stocks is crucial. This study shows that economic uncertainty plays a mediating role between reserve currency value and the volatility of clean energy stocks, indicating that the risk of clean energy stocks is influenced by uncertainty factors.