Do all clean energy stocks respond homogeneously to oil price?

Highlights: • The relationship between clean energy stock and oil price is heterogeneous across sub-sectors of the clean energy stock market. • The costs and effectiveness of using oil as a hedging instrument for a clean energy portfolio depend on the types of clean energy stock. • The optimal portfolio weight strategy leads to larger risk reduction than the optimal hedge ratio strategy. -- Abstract: This paper investigates whether the relationship between oil price and clean energy stock is homogeneous across sub-sectors of the clean energy stock market and its implications for portfolio diversification and clean energy finance policy. We contribute to the literature by being the first empirical paper to document the oil price-clean energy stock relationship at a disaggregate level, thereby providing a more detailed picture of the clean energy stock market. Our findings show that the relationship between oil price and clean energy stock varies largely across clean energy stock sub-sectors. Specifically, biofuel and energy management stocks are the most connected to oil price, while wind, geothermal, fuel cell stocks are among the least connected to oil price. This implies that the hedging cost and effectiveness of a clean energy investment portfolio is dependent on the type of clean energy stock included, therefore, active portfolio management at a disaggregate level is of particular importance. Additionally, policy should take into account the specific characteristics of individual clean energy sub-sectors in order to effectively promote clean energy investment.