Abstract
Previous studies argue that the relationships between clean/green and dirty energy assets are time-varying, but there is a lack of evidence on the hedging ability of clean energy stocks and green bonds for dirty assets, such as crude oil and an energy stock index exchange traded fund (ETF), and the portfolio implications. Furthermore, potential drivers of the dynamics of the hedge portfolio returns are still unknown. To address these research gaps, the authors provide an extensive analysis of the hedging ability of clean/green assets against two dirty energy assets (crude oil prices and energy ETF) using daily data from 3 January 2012 to 29 November 2019. Using corrected dynamic conditional correlation models, the authors model correlation and then compute hedge ratios and hedging effectiveness, which all seem to vary with time. The results from hedging effectiveness indicate that investors should follow a dynamic hedging strategy and that clean energy stocks are more effective hedge than green bonds, especially for crude oil. The application of regression analyses shows that the implied volatilities of US equities and crude oil as well as US dollar index have a negative impact on the hedge portfolio returns, whereas gold prices and inflation have a positive impact.
Highlights
The centrality of fossil fuels, such as crude oil, in both the global energy system and economic development of modern societies cannot be overestimated
For the two dirty assets, the hedge ratio is mostly positive, which suggests that a short position in clean energy stocks is needed to minimize the risk of a long position in each of crude oil and energy exchange traded fund (ETF)
For the case of green bonds and energy ETF, the hedge ratio is negative, which is the opposite to that found for clean energy stocks and energy ETF
Summary
The centrality of fossil fuels, such as crude oil, in both the global energy system and economic development of modern societies cannot be overestimated. Crude oil represents a dirty source of energy; its burning emits various air pollutants and greenhouse gases that generally strengthen global warming. Motivated by such environmental concerns and the adoption of government policies to move toward clean energy, investments in renewable energy have flourished over the last decade [1,2]. The relationships between clean (green) and dirty energy assets affect portfolio choices, and understanding the hedging effectiveness and the drivers of the hedge portfolio returns has portfolio implications for investors and portfolio managers. Knowledge about the time-varying relationships between clean (green) and dirty assets affects investment and risk management
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