Exploring the sources of systemic risk and trading strategies in energy and stock markets

Abstract

This study aims to investigate the impact of the energy transition on asset pricing by analyzing the different sources of systemic risk in a comprehensive system of one traditional energy ETF, one clean energy ETF, seven oil-exporting country ETFs, and six oil-importing country ETFs. We find that shocks to the traditional (clean) energy market are the primary source of short-term (long-term) systemic risk, suggesting that oil-dependent countries have started to incorporate the long-term risks associated with clean energy into the pricing of related assets. Meanwhile, we document both homogeneity within and heterogeneity between oil exporters and oil importers in the transmission patterns of systemic risk. These findings can help provide customized trading strategies for investors with diverse profiles. Additionally, we compare the regime-dependent hedging strategy with both the regime-dependent diversification strategy and the dynamic hedging strategy, demonstrating that it is the most effective for investors aiming to minimize portfolio volatility. Collectively, our results provide valuable insights that can assist policymakers, portfolio managers, and investors in adapting to the evolving dynamics of the energy transition.