Hedging Strategies Among Financial Markets: The Case of Green and Brown Assets

Abstract

This study recognises the growing importance of the green energy market and its classification as viable financial asset. The risk mitigation of such investment is of importance to investors. As such, we examine the hedging strategies of brown market instruments (gold, oil, bond and the composite S&P500) on the green markets (renewable energy stocks and bonds). To examine the effect of the state of the market, we divide the dataset into two: pre-covid (1/12/2008 – 10/03/2020) and covid-era (11/03/2020 – 30/09/2021). Two key findings emanate from our results: first, conventional bonds and stocks provide the most consistent hedge for investment in the green markets and time periods. Second, results are sensitive to the state of the market, as hedging effectiveness dropped covid period in the green stock market. The attendant policy implications of the results are discussed.