What drove the mid-2000s explosiveness in alternative energy stock prices? Evidence from U.S., European and global indices

Soaring prices in European alternative energy stocks and their subsequent tumble have attracted attention both from investors and academics. We extend recent research to an international setting and analyze whether the explosive price behavior of the mid-2000s was driven by rising crude oil prices and overall bullish market sentiment. Inflation-adjusted U.S. alternative energy stock prices do not exhibit signs of explosiveness. By contrast, we find strong evidence of explosive price behavior for European and global sector indices, even after controlling for a set of explanatory variables. Interestingly, while the sector indices plunged with the outbreak of the global financial crisis, idiosyncratic components continued to rise and did not start to decline until after world equity markets had already begun to recover in 2009. This finding suggests a substantial revaluation of alternative energy stock prices in light of intensifying sector competition and shrinking sales margins and casts some doubts on the existence of a speculative bubble. Nevertheless, we observe temporary episodes of explosiveness between 2005 and 2007 followed by rapid collapses, indicating the presence of some irrational exuberance among investors.