Volatility Connectedness between Clean Energy Firms and Crude Oil in the COVID-19 Era

Matteo Foglia and Eliana Angelini
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Eliana Angelini: Department of Economics at “G.d’Annunzio”, University of Chieti-Pescara, Viale Pindaro n. 42, 65127 Pescara, Italy

Sustainability, 2020, vol. 12, issue 23, 1-22

Abstract: The work investigates the volatility connectedness between oil price and clean energy firms over the period 2011–2020 (including the COVID-19 outbreak). Using the volatility spillover models, and dynamic conditional correlation, we are able to identify the volatility spillover effect between these financial markets and its implications for portfolio diversification. The results indicate a significant change in both static and dynamic volatility connectedness around the COVID-19 outbreak. For instance, total connectedness index changes from 21.36% (pre-COVID-19) to 61.23% (COVID-19). This finding shows the strong effect of the COVID-19 pandemic on these financial markets. Furthermore, we show how the WTI oil from the volatility transmitter (before the outbreak of the pandemic) becomes a risk receiver after the start of the global pandemic COVID-19. Our findings indicate that recent pandemic intensified volatility spillovers, supporting the financial contagion effects. Finally, we determine the optimal hedge ratios and portfolio weights. The estimates provided suggest the need for active portfolio management, taking into account the distinct characteristics of each sector and thus, the firm. For example, the optimal weight analysis shows how the clean sector has become important in optimal diversification strategies. Our results can be used for portfolio decisions and regulatory policymaking, particularly in the current context of high uncertainty.

Keywords: volatility spillover; clean energy firms; oil price; hedging; portfolio weights; COVID-19 (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

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