Connectedness between fossil and renewable energy stock indices: The impact of the COP policies

Abstract

Copyright © 2023 The Author(s). Switching from fossil to renewable energy is essential to reduce global warming. The existing literature has found evidence of connectedness between fossil and renewable energy stock indices but has not considered the possible impact of climate policies on those linkages. This paper provides evidence on the latter issue to fill this gap. Specifically, in addition to full sample estimation, endogenous break tests and sub-sample estimation are carried out using daily data for a wide range of indices over the last decade. The results suggest that renewable energy stock indices play a significant role in terms of connectedness; moreover, the two detected breaks indicate that both the unsuccessful COP17 held in Durban in 2011 and the anticipation of decisive action at the COP26 in Glasgow affected connectedness, namely spillovers are stronger during periods characterized by more effective climate policies. This confirms the crucial importance of policy intervention to tackle climate change.