Clean vs. dirty energy ETFs: How economic uncertainty drives market volatility

This study investigates the causal relationship between clean energy (PBW) and dirty energy (USO) ETFs and the Cable News-based Economic Policy Uncertainty (CN-EPU) index in the U.S., with a focus on the COVID-19 pandemic’s economic impact. Employing symmetric, asymmetric, and time-varying causality tests, we assess whether economic uncertainty influences energy ETFs from April 17, 2020, to November 30, 2023. The results indicate a significant causal relationship between the news-based EPU index and USO under both symmetric and asymmetric conditions. Notably, asymmetric analysis reveals that the negative components of uncertainty emerge as the primary drivers of this relationship, suggesting that investor sentiment reacts more strongly to negative economic signals in the fossil fuel market. In contrast, PBW does not exhibit a consistent causal link with economic uncertainty throughout the study period. However, time-varying analysis identifies short-term causal effects in 2021, coinciding with key policy developments, such as the Fit for 55 initiative, highlighting the role of regulatory shifts in clean energy investment dynamics. These findings underscore the asymmetric impact of economic uncertainty on energy markets and emphasize the significance of policy stability in shaping investor behavior, particularly in times of heightened economic volatility.