Climate Risk and the Dynamic Correlation Between Clean Energy and Technology Stock Markets

The transition from fossil fuels toward cleaner energy necessitates technological innovation, suggesting not only an association between clean energy and technology stocks but also a potential impact of climate risk on this association. In this paper, we examine the impact of climate risk on the nexus of clean energy and technology stocks using a time-varying correlation model. We find physical and transition climate risk to be positively associated with the long-term correlation between clean energy and technology stocks, whereas the effect of transition risk is more persistent. In contrast, the short-term correlation tends to decrease following shocks to physical climate risk, as clean energy stocks react stronger to physical risk shocks than technology stocks. Our analysis provides new insights into the heterogeneous role of climate risk that can be particularly relevant for investors and academics interested in the financial implications of climate change