#GREEN BUBBLE SLIDES HOW TO#

I empirically apply the PSY methodology to S&P 500 price-dividend ratios over a long historical period from January 1871 to December 2021. For the origination and termination of multiple bubbles, the method delivers a consistent real-time date-stamping strategy.

Phillips et al. (PSY) develop a recursive flexible window method that is suited for practical implementation with long historical time series.

Central banks and fiscal regulators conduct these procedures with real-time data as warning alerts in surveillance strategies.

#GREEN BUBBLE SLIDES HOW TO#

How to Detect Financial Bubbles in Real Time?Īn effective method to identify and date financial bubbles is recursive procedures, which belong to the class of econometric detection mechanisms. In light of the “green technological revolution,” and along similar lines, given the high probability of a large-scale adoption of the “green technology” that we are currently experiencing, 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. Stock prices in both the new and old economies are depressed, because systematic risk is increasing, which also positively affects the discount rates. Subsequently, with an increasing probability that the new technology is adopted, it is more likely that the old economy is affected by the new economy. However, once a technology is adopted at a larger scale, the risk becomes more and more systematic. If a particular technology is never adopted, the risk stays idiosyncratic. Initially, the risk is mainly idiosyncratic, because the scale of production is small and it is unlikely that the new technology is adopted at a large scale. In the general equilibrium model of Pastor and Veronesi, stock price bubbles might occur for innovative firms during technological revolutions, where over time, the nature of the risks related to new technologies changes. However, as was ultimately the case with tech companies, today’s inflated pricing for climate-friendly assets may reflect their longer-term potential. Well, one might argue that the market for sustainable assets now and the IT stocks immediately before the dot-com bubble burst have some clear similarities. Should We Be Concerned About This Development? The hype is even getting a bit irrational: Tiziana Life Sciences, a biotech firm with the ticker “TLSA,” benefited from confused investors last year when they mistook it for Tesla, ticker symbol “TSLA.” High valuations, aggressive interest from individual investors, and parabolic price action are all signs that there is a bubble forming in green energy stocks. The shares of SunRun, a solar firm, and Tesla and Nio, makers of electric vehicles, have recently risen three-fold, six-fold, and nine-fold, respectively. I argue that this is a good bubble because it will enable businesses to invest cheaply in green energy, hastening the transition away from fossil fuels and assisting in the fight against climate change.ĭuring the year 2020, for Orsted, a windpower producer, the market value nearly doubled. 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 apply a recently developed recursive testing procedure and dating algorithm that is useful in detecting multiple bubble events. 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. As a result, systematic risk increased, which depressed stock prices, because it pushed up the discount rates in the new and old economies. Subsequently, with an increasing probability of adoption, also, the old economy was affected by the new technology and, hence, the wealth of the representative agent. In fact, before 2000, the risk of the new technology was primarily idiosyncratic because of the limited scale of production and the low likelihood of a widespread adoption. One may contend that there are some clear similarities between the market for sustainable assets now and the situation of tech stocks right before the collapse of the dot-com bubble.

Green bubble slides