Traditional vs. EV automakers exhibit diverging sensitivity to oil and clean energy markets
image: It presents the heatmap of return correlations among automaker stocks, oil price benchmarks and clean energy indices. The results reveal three key patterns that are directly linked to our hypotheses. First, traditional automakers, Toyota, Honda, Ford and GM – exhibit strong and statistically meaningful correlations with one another (ranging from 0.47 to 0.76), suggesting a high degree of co-movement driven by shared exposure to macroeconomic and industrial factors. This observation supports Hypothesis 1 (H1), which posits that traditional automakers are more sensitive to oil market dynamics and systemic volatility (Gong and Jia, 2024). Second, EV manufacturers, notably Tesla and BYD, show weaker correlations with traditional automakers. For example, the Tesla–Ford correlation is 0.31, while BYD–GM is 0.27. These relatively low coefficients indicate a fundamental divergence in the drivers of EV stock performance, aligned with Hypothesis 2 (H2) regarding the limited sensitivity of EV manufacturers to oil price fluctuations (Kurkula et al., 2022). Third, the influence of clean energy indices varies across EV manufacturers. Tesla exhibits a strong correlation with the NASDAQ Clean Edge Green Energy Index (CELS) at 0.63, suggesting a close alignment with the renewable energy sector. In contrast, BYD’s correlation with CELS is more moderate at 0.42. This should not be interpreted as a lack of clean energy orientation; rather, it reflects BYD’s distinctive positioning as a vertically integrated company with localized battery development and secure upstream material access, which may reduce its exposure to external market dependencies (Huang et al., 2023; Zi, 2023). These contrasting correlation patterns lend support to Hypothesis 3 (H3), which posits that the stock performance of EV manufacturers is increasingly shaped by clean energy dynamics rather than traditional oil market fluctuations (Baur and Todorova, 2018).
Credit: Yi Fang (Jilin University, China) Chengbo Fu and Soleiman Hashemishahraki (University of Northern British Columbia, Canada)
Background and Motivation
The global transition from internal combustion engines to electric vehicles (EVs) is reshaping not only the automotive industry but also its financial linkages to energy markets. While traditional automakers remain heavily tied to oil price fluctuations, EV leaders like BYD and Tesla are increasingly influenced by clean energy trends. This study investigates how oil market volatility and clean energy dynamics differentially impact the stock performance of traditional and EV manufacturers, providing critical insights for investors and policymakers navigating the energy transition.
Methodology and Scope
Using daily data from January 2013 to December 2023, the research analyses major automakers—including traditional firms (Ford, GM, Toyota, Honda) and EV producers (Tesla, BYD)—alongside oil benchmarks (WTI, Brent), clean energy indices (NASDAQ Clean Edge Green Energy Index, S&P Global Clean Energy Index), and broad market indicators. The study employs a multi-method econometric framework: linear regressions and GARCH models assess volatility patterns; DCC-GARCH captures time-varying correlations; and the Diebold–Yilmaz connectedness approach measures cross-market volatility spillovers, particularly during crises such as the COVID-19 pandemic and the Russia–Ukraine conflict.
Key Findings and Contributions
- Traditional automakers exhibit significant sensitivity to oil price volatility, with strong positive correlations and higher spillover effects during market stress.
- EV manufacturers, notably Tesla and BYD, show markedly lower sensitivity to oil shocks but stronger alignment with clean energy indices. Tesla’s returns correlate closely with the NASDAQ Clean Edge Green Energy Index (0.63), while BYD demonstrates moderate links, reflecting its vertically integrated, supply-chain-resilient business model.
- Volatility spillovers intensify during global crises, with the Total Connectedness Index peaking at 92.9% in March 2020. Traditional automakers act as net receivers of volatility from oil markets, whereas EV firms are more influenced by clean energy and technology equity trends.
- BYD’s strategic positioning—through vertical integration, policy alignment, and battery innovation—illustrates how operational strategies can decouple financial performance from fossil fuel volatility.
Why It Matters
Understanding these differentiated risk profiles is essential for stakeholders:
- Investors can better assess sectoral risks and construct resilient portfolios by favouring EV firms during oil market turbulence.
- Policymakers gain evidence to support clean energy integration and infrastructure investments that facilitate automotive electrification.
- Corporate Strategists observe how vertical integration and policy alignment, as demonstrated by BYD, enhance financial stability amid energy transition uncertainties.
Practical Applications
- Portfolio Management: Investors should consider allocating to EV manufacturers as a hedge against oil price volatility and as a play on clean energy growth.
- Policy Design: Governments can reinforce EV adoption through stable incentives, charging infrastructure, and support for vertical integration in battery supply chains.
- Corporate Strategy: Automakers, especially traditional firms, can reduce oil exposure by accelerating electrification, investing in clean energy linkages, and diversifying supply chains.
- Risk Assessment: Financial analysts and regulators should monitor volatility spillovers between energy and automotive equities, particularly during geopolitical or health crises.
Discover high-quality academic insights in finance from this article published in China Finance Review International. Click the DOI below to read the full-text!