This paper examines the recent interactive relationships between crude oil prices and stock performances of alternative energy companies. Oil prices and stock index of alternative energy sector are found independent from each other before late 2006. Contrary to existing studies, however, we find significant interdependence between oil prices and stock index of alternative energy industry in the recent years. Since late 2006, oil prices become significantly responsible for the stock performances of alternative energy companies. This finding suggests that the stock market investors of alternative energy sector incorporate oil price shocks into their trading decisions only recently.Crude oil price; Alternative energy; Oil stock index

Alex YiHou Huang

Chiao-Ming Cheng

Chih-Chun Chen

Wen-Cheng Hu

English

Research Papers in Economics

     
 
 
  
  
Volume 31, Issue 3 
  
Relationship between Crude Oil Prices and Stock Prices of Alternative Energy 
Companies with Recent Evidence 
  
 
 
Alex YiHou Huang  
College of Management, Yuan Ze University 
Chiao-Ming Cheng  
College of Management, Yuan Ze University
Wen-Cheng Hu  
College of Management, Yuan Ze University 
Chih-Chun Chen  
Department of Management, Fo Guang University
Abstract 
This paper examines the recent interactive relationships between crude oil prices and stock performances of alternative 
energy companies. Oil prices and stock index of alternative energy sector are found independent from each other 
before late 2006. Contrary to existing studies, however, we find significant interdependence between oil prices and 
stock index of alternative energy industry in the recent years. Since late 2006, oil prices become significantly 
responsible for the stock performances of alternative energy companies. This finding suggests that the stock market 
investors of alternative energy sector incorporate oil price shocks into their trading decisions only recently.
The paper benefited from the comments of participants in the 50th Southwestern Financial Association annual meeting. This research is 
supported in part by the National Science Council of Taiwan (NSC99-2410-H-155-012). 
Citation: Alex YiHou Huang and Chiao-Ming Cheng and Wen-Cheng Hu and Chih-Chun Chen, (2011) ''Relationship between Crude Oil 
Prices and Stock Prices of Alternative Energy Companies with Recent Evidence'', Economics Bulletin, Vol. 31 no.3 pp. 2434-2443. 
Submitted: May 12 2011.   Published: August 29, 2011. 
 
     Economics Bulletin, 2011, Vol. 31 no.3 pp. 2434-2443
Page 1 of 9 
 
1.    Introduction 
 
Oil is the primary energy source in modern economies, and crude oil price dynamics 
have been documented as a major influence on economic activities.
1  Park and Ratti (2008) 
argue that oil price volatility is a key factor in stock market operation. Oil prices have been 
dramatically volatile over  the past few years.  Chiou and Lee (2009) find  significant 
structural change in recent oil prices and show that the impacts from oil to stock prices are 
dynamical and asymmetrical.   
Bleischwitz and Fuhrmann (2006) and McDowall and Eames (2006) show that the 
recent popularity of alternative energy sources is mainly motivated by two factors: 
environmental protection and the political instability of oil-exporting countries. 
Consequently, the relationship between oil prices and the alternative energy industry bears 
further examination. In this paper, we address the narrower  question of how oil prices 
interact with the performance of alternative energy firms and the stock returns of oil 
companies in recent years. 
Henriques and Sadorsky (2008) find that oil prices and the stock prices of alternative 
energy companies do not interact with each other. However, they also find that the trend of 
an alternative energy stock index is significantly linked with that of technology stock prices. 
The present paper extends this line of research, focusing on the interaction between oil prices 
and the financial performance of alternative energy companies in a more recent sample. The 
returns of oil industry stocks are also considered, since prior studies have suggested that they 
are significantly related to the alternative energy industry (e.g. Sadorsky, 2001).   
Most of the major oil exporters are Middle East sovereigns, and the conflicts in this 
region often generate large impacts on oil prices.
2  For the first time in the literature, we will 
show that oil prices behaved differently before and after two recent Middle East wars. In 
contrast  with the result of Henriques and Sadorsky (2008),  we document a significant 
interdependence between oil prices and the stock index of alternative energy firms, but only 
after the Lebanon War of 2006.
3  The next section presents the data and methodology of the 
study in detail. It is followed by a discussion of empirical outcomes and concluding remarks. 
 
                                                 
1  See Hamilton (1983), Sadorsky (1999), and Nandha and Faff (2008) for examples.   
2  The Middle East holds 60% of global oil reserves and accounts for 32% of current oil production (data source: 
Energy Information Administration). The oil price of West Texas Intermediate (WTI) jumped by 86%, from 
$16.10 to approximately $30, immediately after the occupation of Kuwait by Iraq in 1990. 
3  The sample period of Henriques and Sadorsky (2008) spans January 2001 to May 2007. 
2435Economics Bulletin, 2011, Vol. 31 no.3 pp. 2434-2443
Page 2 of 9 
 
2.    Data and Methodology 
 
Three oil price series are used in this study: the spot prices of West Texas Intermediate 
(WTI), the spot prices of Brent (Brent), and NYMEX Crude Futures (Futures). Following 
Henriques and Sadorsky (2008), we adopt the WilderHill Clean Energy Index (ECO) as a 
proxy for the stock performance of alternative energy companies. All the components of this 
index are required to have at least one business concentration that produces or develops 
environmentally friendly energy.
4  The crude oil stock index of the  American Stock 
Exchange, comprising 12 global oil companies, is used to track the financial performance of 
the oil industry.   
Our sample spans the period from January 3, 2001 to May 31, 2010. All time series are 
weekly and extracted from the Thomson Reuters Datastream database. Since oil prices are 
strongly affected by instability in the Middle East, we divide the sample into three time 
segments around the dates of two Middle East wars: the Iraq War in March 2003 and the 
Lebanon War in July 2006. Table 1 provides summary statistics of the series for the entire 
sample period and the three sub-periods.
5  As the table shows, the time series of spot prices 
and futures prices for crude oil have very similar properties. When the three sub-periods are 
compared, however, we find that their volatility and skewness measures are significantly 
different. Using WTI as an example, the standard deviations are 4.01, 13.54, and 23.41 for 
Periods I, II, and III respectively, while the skewness measures are 0.15, 0.28, and 0.30. 
Generally, oil prices are most  stable in Period I (when the coefficients  of variation  are 
lowest), grow gradually in Period II (the distributions become skewed to the right), and 
fluctuate most strongly in Period III (when ranges and coefficients of variation are highest). 
All three trends are clearly illustrated in Figure 1, which graphs the oil price of WTI 
during the sample period. Before the 2003 Iraq War (first grey band), the oil price was 
generally stable between $20 and $40. After the Iraq War the oil price trends significantly 
upward, reaching nearly $80. After the Lebanon War of 2006 (second grey band), a small 
drop in the oil price was followed by a dramatic jump to more than $140 over two years. The 
price then crashed below $40 in late 2008. 
This study uses  the  vector autoregressive (VAR) model  and  vector error correction 
model (VECM) to examine the interdependencies of the variables. VAR and VECM are 
                                                 
4  The ECO index is a weighted stock index with worldwide green energy companies as components. Please see 
detail description of the index at http://www.wildershares.com/index.php. 
5  In order to avoid extremely volatile movements of oil prices, we exclude a four-month period around each 
war from the sample. 
2436Economics Bulletin, 2011, Vol. 31 no.3 pp. 2434-2443
Page 3 of 9 
 
maximum likelihood estimation models requiring only a single regression. VECM can be 
seen as a first-difference version of VAR;  the former is applied when each variable of 
regression is integrated with order 1. Prior to the application of VAR/VECM, we conduct 
unit root and  Johansen cointegration tests  to check for  stationarity  and  long-term 
relationships  respectively.  The  Granger  Causality test is  also  applied  to evaluate the 
interdependence between variables.
6 
 
3.  Empirical Results 
 
The  Augmented Dickey-Fuller and Phillips-Perron statistics fail to reject the null 
hypotheses of a unit root process for all series. These results hold during the entire sample 
period and during  the sub-periods.  Both tests also  confirm stationarity for the first 
differences of the sample series. The Johansen statistics fail to reject the null hypothesis of 
no cointegrated vector between oil prices and the ECO index, regardless of which sample 
period is being examined. However, significant trace statistics imply that oil prices and the 
Oil index are cointegrated during time periods II and III. 
Table 2 presents the VAR/VECM and Granger Causality test results. VAR is applied to 
the first differences of oil prices and the ECO index when the I(1) series are not cointegrated. 
VECM is only applied to the cointegrated series (oil prices and the Oil index in Periods II 
and III). The optimal lag is one, based on the Schwartz Bayesian Criterion (SBC). The first 
and second columns of the table are the left-hand and right-hand variables. 
Panel A describes results for the entire sample period. The first two rows show VAR 
outcomes between the WTI price and the ECO index. The coefficient estimates are 0.1310 
and 0.0482 for the two directions of causality, but only causality from oil prices to the ECO 
index (coefficient 0.0482) is statistically significant. The finding that the ECO index has no 
effect on the WTI price is confirmed by the Granger Causality test, which yields χ
2 equal to 
1.16 (insignificant).  Similar results (not shown) are obtained  when  the  ECO index is 
modeled with  the  other two oil prices. Between  oil prices  and  the oil  stock  index, 
interdependence is generally significant and two-way. There is a significant negative impact 
from the Oil index to the oil price, and a significant positive impact from oil prices to the Oil 
index.
7 
                                                 
6  Please see Enders (2004) for detailed descriptions of VAR/VECM and the time series tests. 
7  Please note that the negative relation shows that lag oil index inversely lead oil price and does not suggest 
contemporaneous relation. Such lag negative correlation is often observed from mean-reverting time-series. 
2437Economics Bulletin, 2011, Vol. 31 no.3 pp. 2434-2443
Page 4 of 9 
 
Panel B presents the results for Period I, the pre-Iraq  War period. All  estimated 
coefficients for the oil prices-ECO index vector are statistically insignificant. This finding 
implies that the two series did not interact with each other prior to 2003. There is also no 
significant relationship between oil prices and the Oil index. 
Panel C provides the outcomes for Period II, the time between the two wars. Between 
oil prices and the  ECO index, all estimated coefficients are statistically  insignificant. 
However, there is one-way causality from oil prices to the Oil  index.  The  estimated 
significance levels for this relationship are 0.0097, 0.0077, and 0.0081 for WTI, Brent, and 
Futures prices respectively. This result is confirmed by the Granger Causality test.   
Panel D presents the outcomes for Period III (June 2006 to May 2010; post-Lebanon 
War).  Between oil prices and the  ECO index, we  now  observe the significant one-way 
dependence detected in Panel A. In the first two rows of Panel D, the estimated coefficients 
are 0.1050 and 0.1066 but only the second of these is significant, at the 1% level.   
Thus, the ECO index is found to depend on oil prices only during Period III, after the 
Lebanon War in 2006. As shown in Figure 1 and Table 1, this is also the period when oil 
prices exhibited drastic movements, and furthermore overlaps with the recent financial crisis. 
The causal link between oil prices and the ECO index implies that investors in alternative 
energy companies are now paying closer attention to oil price shocks when making their 
investment decisions. When oil prices are highly volatile, there is a higher demand for green 
energy and of the companies in the ECO index perform better.
8  During the final period we 
also found a highly significant interaction between oil prices and the Oil index, with negative 
impacts from stock prices to oil prices and positive impacts in the reverse direction. 
 
4.  Concluding Remarks 
 
This study documents a significant difference in the dynamics of oil prices before and 
after the Middle East wars of 2003 and 2006. Oil prices are relatively stable prior to the Iraq 
war of 2003, grow gradually during the period between the two wars, and fluctuate strongly 
in the most recent period. Only in the period following the two wars do oil prices generate a 
significant impact on the stock index of green energy companies. This finding implies that 
investors in alternative energy are now paying closer attention to oil price shocks when 
                                                 
8  Empirical results are similar when we replace WTI with Brent prices or oil futures, suggesting that the ECO 
index significantly depends on oil price movements during this period. The outcomes of these models are 
excluded from the table due to space limitations, but are available from the authors upon request. 
2438Economics Bulletin, 2011, Vol. 31 no.3 pp. 2434-2443
Page 5 of 9 
 
making their investment decisions. Another behavior unique to  the  post-war  period  is a 
two-way causality between oil prices and the Oil index. Taken together, these relationships 
suggest that the crude oil market and the energy sector stock market are interacting more 
closely in recent years than they did prior to 2006. 
2439Economics Bulletin, 2011, Vol. 31 no.3 pp. 2434-2443
Page 6 of 9 
 
Acknowledgements 
The paper benefited from the comments of participants in the 50
th Southwestern Financial 
Association annual meeting. This research is supported in part by the National Science 
Council of Taiwan (NSC99-2410-H-155-012). 
 
References 
Bleischwitz, R. and K. Fuhrmann (2006) “Introduction to the special issue on hydrogen in 
Energy Policy” Energy Policy 34, 1223-1226. 
Enders, W. (2004) Applied Econometric Time Series, John Wiley & Sons, New Jersey. 
Hamilton, J.D. (1983) “Oil and the macroeconomy since World War II” Journal of Political 
Economy 91, 228-248. 
Henriques, I. and P. Sadorsky (2008) “Oil prices and the stock prices of alternative energy 
companies” Energy Economics 30, 998-1010. 
McDowall, W. and M. Eames (2006) “Forecasts, scenarios, visions, backcasts and roadmaps 
to the hydrogen economy: A review of the hydrogen futures literature” Energy Policy 
34, 1236-1250. 
Nandha, M.  and  R.  Faff  (2008)  “Does oil move equity prices? A global view”  Energy 
Economics 30, 986-997. 
Park, J.  and R.A. Ratti (2008) ”Oil price shocks and stock markets in the U.S. and 13 
European countries” Energy Economics 30, 2587-2608. 
Sadorsky, P. (1999) “Oil price shocks and stock market activity” Energy Economics 21, 
449-469. 
Sadorsky, P. (2001)  “Risk factors in stock returns of Canadian oil and gas companies” 
Energy Economics 23, 17-28. 
2440Economics Bulletin, 2011, Vol. 31 no.3 pp. 2434-2443
Page 7 of 9 
 
Table 1  Descriptive Statistics 
 
  WTI  Brent  Futures  ECO index  Oil index 
Panel A. Entire Period (2001/01/03~2010/05/31) 
Mean  54.49    53.15    54.54    158.98    868.92   
Median  52.51    51.09    52.77    160.02    875.37   
Maximum  143.74    142.17    143.57    297.05    1625.29   
Minimum  18.38    18.46    18.36    63.73    411.09   
Std. Dev.  26.22    26.21    26.24    49.01    332.85   
C.V.  0.48    0.49    0.48    0.30    0.38   
Skewness  0.88    0.82    0.87    0.14    0.30   
Kurtosis  3.51    3.33    3.50    2.16    1.88   
 
Panel B. Period I: Pre-Iraq War Period (2001/01/03~2003/02/26) 
Mean  26.60    25.40    26.57    158.17    508.98   
Median  26.94    25.77    26.92    163.49    515.12   
Maximum  37.96    33.54    37.70    258.71    590.08   
Minimum  18.38    18.46    18.36    78.78    411.09   
Std. Dev.  4.01    3.46    3.95    47.07    46.69   
C.V.  0.15    0.14    0.15    0.30    0.09   
Skewness  -0.04    -0.18    -0.06    0.16    -0.36   
Kurtosis  3.28    2.64    3.31    2.06    2.12   
 
Panel C. Period II: Post-Iraq and Pre-Lebanon War Period (2003/05/07~2006/06/28) 
Mean  47.82    45.74    47.86    160.04    759.92   
Median  47.36    44.09    47.27    156.80    713.44   
Maximum  72.26    73.42    72.28    253.02    1165.25   
Minimum  26.24    24.18    26.23    97.42    449.23   
Std. Dev.  13.54    12.15    13.62    30.61    218.72   
C.V.  0.28    0.27    0.28    0.19    0.29   
Skewness  0.14    0.21    0.14    0.79    0.23   
Kurtosis  1.73    1.73    1.71    3.79    1.67   
 
Panel D. Period III: Post-Lebanon War Period (2006/09/06~2010/05/31) 
Mean  76.54    75.74    76.65    160.39    1175.30   
Median  72.23    71.48    72.15    182.54    1143.42   
Maximum  143.74    142.17    143.57    297.05    1625.29   
Minimum  32.94    35.62    34.62    63.73    802.18   
Std. Dev.  23.41    22.38    23.31    61.17    211.76   
C.V.  0.30    0.29    0.30    0.38    0.18   
Skewness  0.77    0.81    0.79    0.05    0.19   
Kurtosis  3.25    3.39    3.27    1.55    1.87   
Note: Std. Dev. and C.V. stand for the standard deviation and coefficient of variation respectively.   
2441Economics Bulletin, 2011, Vol. 31 no.3 pp. 2434-2443
Table 2  VAR/VECM and Granger Causality 
 
Left- 
hand side 
Right- 
hand side   
VAR/VECM 
 
Causality 
Coefficient  p-value 
2 χ   p-value 
Panel A. Entire Period (2001/01/03~2010/05/31) 
WTI  ECO index 
 
0.1310  0.2825    1.  16  0.2820   
ECO index  WTI  0.0482  0.0061  ***  7.  60  0.0059  *** 
WTI  Oil index 
 
-0.3649  0.0058  ***  7.  66  0.0056  *** 
Oil index  WTI  0.0037  0.0002  ***  14.  42  0.0001  *** 
Panel B. Period I (2001/01/03~2003/02/26) 
WTI  ECO index 
 
0.6271  0.3987    0.  72  0.3968   
ECO index  WTI  0.0088  0.4864    0.  49  0.4849   
WTI  Oil index 
 
-0.0026  0.9984    0.  01  0.9984   
Oil index  WTI  0.0068  0.3981    0.  72  0.3962   
Panel C. Period II (2003/05/07~2006/06/28) 
WTI  ECO index 
 
-0.0093  0.9705    0.  01  0.9704   
ECO index  WTI  -0.0186  0.4724    0.  52  0.4713   
WTI  Oil index 
 
0.4024  0.5162    0.  42  0.5153   
Oil index  WTI  0.0097  0.0046  ***  8.  28  0.0040  *** 
Panel D. Period III (2006/09/06~2010/05/31) 
WTI  ECO index 
 
0.1050  0.4857    0.  49  0.4849   
ECO index  WTI  0.1066  0.0037  ***  8.  63  0.0033  *** 
WTI  Oil index 
 
-0.4380  0.0261  **  5.  03  0.0250  ** 
Oil index  WTI  0.0057  0.0061  ***  7.  68  0.0056  *** 
Note: *,**, and *** indicate significance at the 10%, 5% and 1% levels respectively. 
2442Economics Bulletin, 2011, Vol. 31 no.3 pp. 2434-2443
 
0
20
40
60
80
100
120
140
160
2001 2002 2003 2004 2005 2006 2007 2008 2009
 
 
Figure 1  Crude Oil Price of WTI 
 
2443

Applied Econometric Time Series,

Does oil move equity prices? A global view”

Forecasts, scenarios, visions, backcasts and roadmaps to the hydrogen economy: A review of the hydrogen futures literature”

Introduction to the special issue on hydrogen

Oil and the macroeconomy since World War II”

Oil price shocks and stock market activity”

Oil price shocks and stock markets in the U.S. and 13

Oil prices and the stock prices of alternative energy companies”

Risk factors in stock returns of Canadian oil and gas companies”

Relationship between Crude Oil Prices and Stock Prices of Alternative Energy Companies with Recent Evidence

http://www.accessecon.com/Pubs/EB/2011/Volume31/EB-11-V31-I3-P218.pdf

Relationship between Crude Oil Prices and Stock Prices of Alternative Energy Companies with Recent Evidence

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