Modeling the Volatility Effects of Climate Policy Uncertainty on Renewable Energy Stock Returns in Nigeria Using the EGARCH Model

Raphael Asu Owan, Asu, Dorcas, N.

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Abstract

This study examined the volatility effects of climate policy uncertainty on renewable energy stock returns in Nigeria using the Exponential Generalized Autoregressive Conditional Heteroskedasticity (EGARCH) model. The increasing importance of renewable energy investments and the growing uncertainty surrounding climate-related policies have raised concerns regarding their implications for stock market performance and investment decisions. Specifically, the study sought to determine the effect of climate policy uncertainty on renewable energy stock returns and to investigate the volatility dynamics associated with climate policy uncertainty shocks. An ex-post facto research design was adopted, utilizing secondary time-series data on renewable energy stock returns and climate policy uncertainty indicators. Descriptive statistics, unit root tests, ARCH-LM tests, and the EGARCH(1,1) model were employed for data analysis. The descriptive statistics revealed substantial fluctuations in renewable energy stock returns and climate policy uncertainty during the study period. The Augmented Dickey-Fuller test confirmed that the variables were stationary at level, while the ARCH-LM test indicated the presence of conditional heteroskedasticity, justifying the use of the EGARCH model. The EGARCH estimation results showed that climate policy uncertainty had a negative and statistically significant effect on renewable energy stock returns (β = -0.0028, p < 0.05). The volatility persistence parameter (β = 0.914, p < 0.05) indicated that shocks to market volatility persisted over time. Furthermore, the asymmetry coefficient (γ = -0.176, p < 0.05) revealed the presence of leverage effects, implying that negative climate policy uncertainty shocks exerted a greater impact on volatility than positive shocks of similar magnitude. Diagnostic tests confirmed the adequacy and stability of the estimated model. The study concluded that climate policy uncertainty constitutes a significant risk factor affecting renewable energy stock market performance in Nigeria. The findings suggest that stable and predictable climate policies are essential for enhancing investor confidence and promoting sustainable investment in the renewable energy sector. The study recommends that policymakers strengthen policy consistency, improve transparency in climate policy implementation, and establish supportive regulatory frameworks to reduce uncertainty and encourage renewable energy investments.

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