Portfolio selection from risk transfer mechanisms in a time of crisis for renewable energy markets

Yu-Ann Wang and Chia-Lin Chang ()
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Yu-Ann Wang: Taiwan Research Institute, Taiwan

No 1108, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: This study explores risk transmission in financial markets, focusing on investor hedging decisions. It examines risk movement between renewable and fossil fuel energy assets in energy ETFs during the Global Financial Crisis (GFC) and the COVID-19 pandemic. A novel test evaluates how an energy asset's volatility impacts the overall portfolio risk, offering insights for managing financial risk. The analysis covers three major renewable energy ETFs (solar, wind, and hydro) and three fossil fuel ETFs (oil, coal, and natural gas). During the COVID-19 crisis, effective combinations such as (solar, coal) and (wind, coal) are recommended for minimizing losses. Although not ideal for hedging solar-related risks, (solar, oil) is advantageous for oil-related shocks. The study found that combining solar with oil and wind with oil was effective in mitigating losses during the GFC and before COVID-19. In non-pandemic periods, combinations like (solar, oil) or (solar, coal) are valuable for risk management. This research highlights the interconnectedness of energy assets and provides actionable insights for investors and policymakers. Future research could examine other events, like the Russia-Ukraine war, impacting global energy markets.

Keywords: Renewable energy; Volatility spillover; Risk Transfer; GFC; COVID-19 (search for similar items in EconPapers)
JEL-codes: C32 C58 G01 G11 G14 Q42 Q47 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2024-09
New Economics Papers: this item is included in nep-cis, nep-ene and nep-fmk
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