Eighteenth International Conference on Environmental, Cultural, Economic & Social Sustainability

Abstract

One might argue that there are some obvious parallels between today’s market for sustainable assets, and tech stocks just before the dot-com bubble burst. Indeed, before 2000, due to the small scale of production and a low probability of a large-scale adoption, the risk of the new technology was initially mostly idiosyncratic. As the probability of adoption increased, the new technology affected the old economy and with it the representative agent’s wealth. The resulting increase in systematic risk depressed stock prices in both the new and old economies, because it pushed up the discount rates. 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 by allowing the companies to make cheap green energy investments, the bubble could speed our shift away from carbon fuels and help to combat climate change.