Wavelet-based test of co-movement and causality between oil and renewable energy stock prices

- We studied co-movement and causality between oil and renewable energy stock prices.
- We used continuous wavelets and linear and non-linear Granger causality in the time-frequency domain.
- Dependence was weak in the short run but gradually strengthened towards the long run.
- We found non-linear causality at higher frequencies and linear causality at lower frequencies.
- Non-linear causality runs from renewable energy indices to oil prices at different time horizons.

We studied co-movement and causality between oil and renewable energy stock prices using continuous and discrete wavelets, firstly, to obtain information on dynamic correlations over time and for different time scales from wavelet coherence and, secondly, to obtain information on linear and non-linear Granger causality in the time-frequency domain. For general and sectoral renewable energy indices for the period 2006-2015, our findings indicate that dependence between oil and renewable energy returns in the short run was weak but gradually strengthened towards the long run, mainly for the period 2008-2012. Our causality tests provide evidence against linear causality at higher frequencies and in favour of unidirectional and bidirectional linear causality at lower frequencies. In contrast, we found consistent evidence of non-linear causality running from renewable energy indices to oil prices at different time horizons and mixed evidence of causality running from oil to renewable energy prices. These results have potential implications for investors in terms of hedging and for policymakers in terms of policy support decisions regarding the development of renewable energy.