From hero to zero: Evidence of performance reversal and speculative bubbles in German renewable energy stocks

Stocks of German renewable energy companies have commonly been regarded as lucrative investment opportunities. Their innovative line of business initially seemed to promise considerable future earnings. As shown by two powerful bubble tests, the positive sentiment for renewable energy stocks even led to explosive price behavior in the mid-2000s. However, intense sector competition and the economic downturn following the global financial crisis erased profit margins to a large extent. As a result, the former fad stocks have recently turned into losers, loading negatively on price momentum and delivering significantly negative Carhart four-factor alphas. The radical shift in Germany's energy policy following the 2011 Fukushima nuclear disaster in Japan could thus only temporarily halt the continuing decline in alternative energy stock prices. - Highlights: ► We examine the return behavior of German renewable energy stocks between 2004 and 2011. ► The former fad stocks have recently turned into loser stocks. ► They produced significantly negative Carhart four-factor alphas since 2008. ► The price behavior before 2008 was considerably driven by explosiveness. ► Upbeat sector sentiment in the mid-2000s might have caused this speculative bubble