The Green Stock Market Bubble

Thorsten Lehnert ()
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Thorsten Lehnert: University of Luxembourg

Circular Economy and Sustainability, 2023, vol. 3, issue 3, 1213-1222

Abstract: Abstract One may contend that there are some clear similarities between the market for sustainable assets now and the situation of tech stocks right before the collapse of the dot-com bubble. In fact, before 2000, the risk of the new technology was primarily idiosyncratic because of the limited scale of production and the low likelihood of a widespread adoption. Subsequently, with an increasing probability of adoption, also, the old economy was affected by the new technology and, hence, the wealth of the representative agent. As a result, systematic risk increased, which depressed stock prices, because it pushed up the discount rates in the new and old economies. Similarly, given the high probability of a large-scale adoption of the new “green technology,” it is likely that there is not only a bubble forming in green energy stocks, but the boom is affecting the stock market as a whole. I apply a recently developed recursive testing procedure and dating algorithm that is useful in detecting multiple bubble events. Using S&P 500 stock market data, price-dividend ratios, I identify the well-known historical speculative bubbles and find an explosive movement in today’s market starting in June 2021, which can be associated with the new “green technology.” I find that an explosive movement in green stocks started roughly a year before it was migrating to the whole stock market. I argue that this is a good bubble because it will enable businesses to invest cheaply in green energy, hastening the transition away from fossil fuels and assisting in the fight against climate change.

Keywords: Stock market; Green bubble; Green technology; Climate change (search for similar items in EconPapers)
JEL-codes: C15 G10 G12 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s43615-022-00223-4

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