Extreme Events Cause Market Efficiency or Inefficiency? Evidence from Precious Metals and Green Stock Indices

Abstract

Background: Green investments offer a promising market-based approach to tackling global climate change but are susceptible to risk transmission from multiple assets. Purpose: To examine the multifractality between precious metals (Gold, Silver, Platinum) and green stock indices, such as Clean Energy Fuels, Nasdaq Clean Edge Green Energy, S&P Global Clean Energy and WilderHill Clean Energy, over the period from 1 January 2018 to 23 November 2023. The study aims to answer the following question: Did the events of 2020 and 2022 cause efficiency or inefficiency in the markets analysed? Methods: The Detrended Fluctuation Analysis (DFA) econophysics model will be used to answer the research question. Results: During the period of stability, there was a clear division between the markets, with Gold and green energy indices demonstrating market efficiency, while Platinum, Silver and some green indices exhibited price persistence, suggesting opportunities for above-average gains. However, the 2020 global pandemic led to widespread inefficiencies in all the markets analysed, with precious metals and green energy indices showing price persistence, indicating patterns that could lead to arbitrage opportunities. The persistence in returns suggested a tendency for asset prices to continue in the same direction for an extended period, offering opportunities to identify ongoing market trends for investment. In the pre-conflict period, the random walk hypothesis was rejected in all markets, with precious metals exhibiting anti-persistence in returns, while green energy indices showed significant persistence. During the conflict period, precious metals and green energy indices converged towards persistence in returns, except Platinum, which showed anti-persistence. Conclusion: This study provides valuable insights for investors and financial market professionals, highlighting the importance of understanding asset price behaviour patterns in different economic contexts.