Cointegration of Renewable Energy Stocks with Other Asset Classes: An Empirical Study in Indian Equity Market

Abstract

Given the urgency of addressing climate change and enhancing energy security, the global focus is shifting from fossil fuels to renewable energy sources. This research investigates the interconnectedness between renewable energy stocks, conventional energy stocks, and the aggregate stock market index in India from January 2015 to December 2023, a period encompassing significant events like the COVID-19 pandemic and the Russia-Ukraine war. Employing a Markov two-state regime switching model and Vector Autoregressive model, the study investigates the performance and interconnectedness of the indices during high and low volatile market states. Our findings reveal that renewable energy stocks significantly influence the returns of both conventional energy stocks and the aggregate market, particularly during high-volatility periods. This study provides novel insights into the temporal behaviour and interdependencies of these indices, highlighting the resilience of renewable energy stocks and their potential as a hedging instrument. The results underscore the importance of policy frameworks in mitigating risks in volatile markets and guiding investments towards sustainable energy. These findings contribute to the literature on emerging economies, offering valuable implications for investors and policymakers aiming to foster a robust financial system that supports environmental sustainability.