Does climate impact the relationship between the energy price and the stock market? The Colombian case

Carlos Villa-Loaiza, Irvin Taype-Huaman, Julián Benavides-Franco, Guillermo Buenaventura-Vera and Jaime Carabalí-Mosquera

Applied Energy, 2023, vol. 336, issue C, No S0306261923001642

Abstract: Climate change imposes increased stress on the relationship between energy and financial markets. Countries with energy matrices that depend on water sources influenced by climatic phenomena must identify and control their impact on energy prices and financial markets. This research analyses if the El Niño Southern Oscillation phenomenon affects the relationship between electricity prices and financial markets. To that end, we apply wavelet analysis for bivariate time series and contagion tests to examine the correlations and evaluate the presence of contagion. The cross-wavelet power spectrum coherence coefficients suggest two periods where energy prices and the stock market are closely related: The strong El Niño phase in 2015, which confirms our conjecture, and the first stages of the 2020 Covid Pandemic. For the el Niño phase, the energy price leads the stock market in scales from three to eight months, while for the pandemic period, the unexpected disruption produces changing patterns for the same scales. There is also a robust long-term coherence for longer scales beginning in 2012. Moreover, the contagion tests confirm the contagion between markets during extreme climate events. Thus, our alternative method to uncover market relationships beyond traditional econometric contagion approaches contributes to theoretical discussions.

Keywords: Energy Prices; El Niño; Wavelets; Hydrological Risk; Contagion (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (5)

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DOI: 10.1016/j.apenergy.2023.120800

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