Hedging Strategies of Green Assets against Dirty Energy Assets

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.

Gold against Asian Stock Markets during the COVID-19 Outbreak

“…Notably, the literature does not provide any evidence for the properties of gold as a hedge or safe-haven against any Asian stock markets during the COVID-19 outbreak. Importantly, it overlooks the drivers of the hedge portfolio returns (Saeed et al 2020). We address these literature gaps.…”

“…Thus, a higher hedging effectiveness score shows higher risk reduction. Following Pan et al (2014), Saeed et al (2020), andDutta et al (2020b), this study estimates the hedging effectiveness (HE) as:…”

“…In line with Saeed et al (2020), we explore potential determinants of the hedge portfolio returns. Specifically, we estimate the following model:…”

“…Then, we compute the optimal weights, optimal hedge ratios, and hedging effectiveness of stockgold portfolios during the pre COVID-19 sub-period and the COVID-19 sub-period. Finally, we determine the drivers of the returns of the hedged portfolio (Saeed et al 2020).…”

“…Firstly, we examine the role of gold as a hedge and safe haven asset against Asian stock markets during the unprecedented COVID-19 outbreak, adding to previous evidence on the ability of gold to shine during stress periods related to global health crises. Secondly, we did not limit our analysis on hedging effectiveness to a static one (Basher and Sadorsky 2016;Yousaf and Hassan 2019) but conduct a time-varying analysis (Saeed et al 2020), which allows us to uncover how the hedging effectiveness of gold is shaped by the COVID-19 outbreak. Thirdly, unlike previous studies, we determine the determinants of the hedge portfolio returns before and after the COVID-19 outbreak, by considering several economic and financial variables.…”