Driving Factors

The Correlation Between Lithium Prices and Tesla Prices

These are the kinds of case studies I will include in the final collective piece I release covering my work on energy. I’d already been working on this one so decided to release it now.

Lithium Price

Post COVID-crash in March 2020, two of the best trades anybody could have made were Tesla ($TSLA) and some exposure to Lithium. Of course, the two are relatively connected. With lithium a key component of electric vehicle batteries, did the rise in one asset contribute to the rise of another? And does that correlation remain today? I’ll assess the correlation statistics between the two variables.

Note: I’m using the Global X Lithium & Battery Tech ETF as a proxy for Lithium price (Green and Red Candles). For Tesla (Orange Line), I’m using the historical data for Tesla stock, adjusted for its stock splits in August 2020 (5-for-1) and August 2022 (3-for-1).

What Is Correlation?

Correlation is a measure that allows us to assess if two different variables (collections of data), in this case, Tesla price and the price of lithium, are moving in the same direction or the opposite direction linearly (a constant rate). This is interpreted by a value between -1 and +1.

If the variables move in the same direction 100% of the time, then the correlation will be +1. If the variables move in opposite directions 100% of the time, the correlation will be -1. These indicate the strongest relationships, whether positive or negative. A correlation of zero indicates no relationship exists between our variables. My hypothesis is that based on the chart above, there will exist a positive correlation between the price of Tesla and Lithium.

I’ll calculate a simple linear regression to measure this correlation. This measures a dependent variable to one or more independent variables. The dependent variable is what we’re interested in, and the independent variable is what we believe will impact our dependent variable. We’ll explore if Tesla's price was affected by the price of lithium.