Do clean energy indices outperform using contrarian strategies based on contrarian trading rules?. (1st June 2023)

• Record Type: Journal Article
• Authors: Day, Min-Yuh; Ni, Yensen
• Is Part Of: Energy. Volume 272(2023)
• Publication Date: 2023-06-01
• Subjects: Contrarian strategies -- Momentum strategies -- Technical trading rules -- Trading signals -- Clean energy indices; Power resources -- Periodicals; Power (Mechanics) -- Periodicals; Energy consumption -- Periodicals; 333.7905
• DOI: 10.1016/j.energy.2023.127113
• Languages: English
• ISSNs: 0360-5442

Abstract

Abstract: As a result of climate change, investors are becoming more interested in investing in clean energy stocks, appealing to many investors due to the prospects of clean energy. Using contrarian trading rules such as the Stochastic Oscillator Index (SOI), Relative Strength Index (RSI), and Bollinger Bands (BBs), we reveal several interesting and important findings. First, we show that better subsequent performance is revealed after overbought rather than oversold phenomena are emitted, indicating that overreaction phenomena may not be temporary in clean energy indices. Second, we show that not only investing strategies but also trading rules are important, as better clean energy index performance is shown following overbought signals emitted by RSI trading rules. Third, we show that taking trading time into account can result in significantly better gains for investors, showing that trading signals issued at different quarters do matter when trading financial instruments closely related to clean energy indices, such as clean energy ETFs. Fourth, we show that, despite being labeled as two distinct clean indices, the S&P and NASDAQ clean energy indices perform very differently, implying that investors should consider the indices' context rather than their names. Highlights: Renewable energy and climate change attract investment to clean energy markets. Getting better later performance after overbought signals as opposed to oversold ones. Superior performance following overbought signals given by RSI trading rules. Trading signals issued at different quarters result in far different performances. These novel and unexpected findings may contribute to the existing energy literature.