Do Geopolitical Risk and Carbon Market Uncertainty Interact to Influence Volatility in Renewable Energy Stocks?

Abstract

This Thesis investigates the interactive influence of geopolitical risk (GPR) and carbon price uncertainty (CPU) on the volatility of renewable energy stocks by employing GARCH-X and GARCH-MIDAS models on data from 2017 to 2022 for European and American stock indices. This study addresses a gap in the literature by examining how these distinct sources of uncertainty jointly affect market stability, a crucial factor for securing the multi-trillion-dollar investments needed for the clean energy transition. Our analysis reveals no statistically significant short-term impacts, indicating that the influence of these risks is frequency dependent. In the long term, while GPR, CPU, and their interaction each individually increase volatility, only CPU remains a significant and positive driver when both are modeled jointly. This suggests that sustained uncertainty in carbon pricing is a more dominant and persistent source of renewable energy market instability than geopolitical events, underscoring that stable, predictable policy frameworks are paramount for fostering the investment climate needed for the energy transition.