Abstract
This study examined how the relationships among the fossil fuel, clean energy stock, gold, and Bitcoin markets have changed since the COVID-19 pandemic took place for hedging the price change risks in the fossil fuel markets. We applied the Bayesian Dynamic Conditional Correlation-Multivariate GARCH (DCC-MGARCH) models using US daily data from 2 January 2019 to 26 February 2021. Our results suggest that the fossil fuel (WTI crude oil and natural gas) and financial markets (clean energy stock, gold, and Bitcoin) generally had negative relationships in 2019 before the pandemic prevailed, but they became positive for a while in mid-2020, alternating between positive (0.8) and negative values (−0.8). As it is known that negative relationships are required among assets to hedge the risk of price changes, this implies that stakeholders need to be cautious in hedging the risk across the fossil fuel and financial markets when a crisis like COVID-19 occurs. However, our study also revealed that such negative relationships only lasted for three to six months, suggesting that the effects of the pandemic were short term and that stakeholders in the fossil fuel markets could cross hedge with the financial markets in the long term.
Highlights
Since the outbreak of the COVID-19 pandemic, many countries have adopted restrictive measures to prevent the spread of the virus, which has led to the stagnation of many industries and a decrease in the demand and consumption of fossil fuels [1]
Compared to the above previous literature, our current study explores how these relationships among fossil fuel, Bitcoin, gold, and clean energy stock markets are changing during the COVID-19 pandemic periods using the Bayesian DCC-MGARCH model
Our study employed the Bayesian DCC-MGARCH model to examine how the correlation between the fossil fuel and clean energy stock, gold, and Bitcoin market is changing since the COVID-19 pandemic took place
Summary
Since the outbreak of the COVID-19 pandemic, many countries have adopted restrictive measures to prevent the spread of the virus, which has led to the stagnation of many industries and a decrease in the demand and consumption of fossil fuels [1]. The reduction in the consumption of fossil fuels is likely to have adverse impacts on fossil fuel prices. Taking the price of the US West Texas Intermediate (WTI) as an example, it dropped below the 20 USD per barrel, which was the lowest in the past 18 years [3]. The S&P 500 Index reached 3380.16 points on 14 February 2020, but plunged to 2237.40 on 23 March 2020, which indicated a drop of 30% within one month [5] as the pandemic started to spread in the US
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