Working Paper

Investing in the Batteries and Vehicles of the Future: A View Through the Stock Market

Abstract: A large number of companies operating in the EV and battery supply chain have listed on a major U.S. stock exchange in recent years. This paper investigates 1) how these companies’ stock returns are related to systematic risk factors that can explain movements in the stock market and 2) how these companies’ idiosyncratic returns are related to one another. To do so, I compile a unique data set of intradaily stock returns that spans the supply chain, including companies focused on the mining of battery and EV-related critical minerals, advanced battery technology, lithium-ion battery production, EV original equipment manufacturers (EV OEMs) and EV charging companies. The returns are decomposed into a systematic and idiosyncratic component, with the systematic component given by latent factors extracted from a large panel of stock returns using high-frequency principal components. A key feature of the returns of interest is that they can be explained not only by a market factor but also by a second factor that loads on tech and consumer discretionary stocks. There is evidence for cross-sectional dependence in the idiosyncratic returns but correlations are generally low, except for some specific groups, e.g., lithium mining companies. The first principal component of the idiosyncratic returns, which can be viewed as an “EV” factor, explains only about 13 percent of their variation.

Keywords: stock returns; principal components; electric vehicles; batteries; high-frequency data;

JEL Classification: G10; Q40; C55;

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Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Working Papers

Publication Date: 2023-09-26

Number: 2314

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