This study aims to examine the dynamic risk-return characteristics of renewable energy (RE) stocks, compare them with traditional energy companies and the overall equity market index (NIFTY50) in India and provide a suitable investment strategy using these assets.
This study uses the Markov regime-switching model to identify high- and low-volatile market regimes to provide insights into the time-varying nature of returns, volatility and correlations across these asset classes.
Despite being more volatile, RE stocks do not provide negative mean returns irrespective of the market regimes. The NIFTY50 index provides consistent and profitable returns during the high-variance regimes, but it produces negative average returns in less volatile markets. On the contrary, conventional energy stocks offer the highest returns in the low-volatile market, but they also show negative average returns during the high-variance regime. The portfolio diversification strategy suggests that combining renewable and conventional energy indices provides the most effective hedge in both regimes.
This research contributes to the understanding of RE stocks as a viable asset class for diversification and risk management in emerging markets like India, emphasizing the importance of adaptive investment strategies in response to market volatility.
The results underscore the necessity for investors, portfolio managers and policymakers to adopt regime-specific and dynamically adaptive strategies tailored to varying market states to optimize returns and manage risks.
This study represents a pioneering effort to explore the dynamic risk-return profile of conventional, renewable and aggregate market indexes within the Indian equity market. By incorporating regime-switching techniques and a tailored RE index, it addresses a key gap in emerging market energy finance and offers actionable insights for dynamic investment strategies.
