Do green economy stocks matter for the carbon and energy markets? Evidence of connectedness effects and hedging strategies

Yingyue Sun, Yu Wei and Yizhi Wang

China Finance Review International, 2024, vol. 14, issue 4, 666-693

Abstract: Purpose - We phrase our analysis around the connectedness effects and portfolio allocation in the “Carbon-Energy-Green economy” system. Design/methodology/approach - This paper utilizes the TVP-VAR method provided by Antonakakiset al. (2020) and Chatziantoniouet al. (2021), and portfolio back-testing models, including bivariate portfolios and multivariate portfolios. Findings - Firstly, the connectedness within the “Carbon-Energy-Green economy” system is strong, and is mainly driven by short-term (weekly) connectedness. Notably, the COVID-19 pandemic leads to a vertical increase in the connectedness of this system. Secondly, in the “Carbon-Energy-Green economy” system, most of the sectors in the green economy stocks tend to be the transmitters of shocks to other markets (particularly the energy efficiency sector), while the carbon and energy markets are always the recipients of shocks from other markets (particularly the crude oil market). Thirdly, Green economy sector stocks have satisfactory hedging effects on the market risk of carbon and energy assets. Interestingly, hedging risks in relatively “dirty” assets requires more green economy stocks than in relatively “clean” assets. Finally, the results indicate that portfolios that include green economy stocks significantly outperform portfolios that do not contain green economy stocks, further demonstrating the crucial role of green economy stocks in this system. Originality/value - Understanding the interactions and portfolio allocation in the “Carbon-Energy-Green economy” system, especially identifying the role of the green economy performance in this system, is important for investors and policymakers.

Keywords: Green economy stocks; Carbon market; Energy market; Connectedness; Portfolio allocation (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eme:cfripp:cfri-05-2024-0229

DOI: 10.1108/CFRI-05-2024-0229

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