Hedging potentials of green investments against climate and oil market risks

Adediran, Idris A; Swaray, Raymond; Orekoya, Aminat O; Kabir, Balikis A

Abstract

Purpose: This study examines the ability of clean energy stocks to provide cover for investors against market risks related to climate change and disturbances in the oil market.
Design/methodology/approach: The study adopts the Feasible Quasi Generalized Least Squares technique to estimate a predictive model based on Westerlund and Narayan’s (2015) approach to evaluating the hedging effectiveness of clean energy stocks. The out-of-sample forecast evaluations of the oil risk-based and climate risk-based clean energy predictive models are explored using Clark and West’s model (2007) and a modified Diebold & Mariano forecast evaluation test (Harvey et al., 1997) for nested and non-nested models respectively.
Findings: The study finds ample evidence that clean energy stocks may hedge against oil market risks. This result is robust to alternative measures of oil risk and holds when applied to data from the COVID-19 pandemic. In contrast, the hedging effectiveness of clean energy against climate risks is limited to 4 of the 6 clean energy indices and restricted to climate risk measured with Climate Policy Uncertainty.
Originality/value: The study contributes to the literature by providing extensive analysis of hedging effectiveness of several clean energy indices (global, US, Europe, and Asia) and sectoral clean energy indices (solar and wind) against oil market and climate risks using various measures of oil risk (WTI and Brent volatility) and climate risk (Climate Policy Uncertainty and Energy and Environmental Regulation) as predictors. It also conducts forecast evaluations of the clean energy predictive models for nested and non-nested models.

Citation

Adediran, I. A., Swaray, R., Orekoya, A. O., & Kabir, B. A. (2023). Hedging potentials of green investments against climate and oil market risks. Fulbright Review of Economics and Policy, https://doi.org/10.1108/FREP-04-2022-0030

• Journal Article Type: Article
• Acceptance Date: Mar 14, 2023
• Online Publication Date: Apr 11, 2023
• Publication Date: 2023
• Deposit Date: Apr 12, 2023
• Publicly Available Date: Apr 13, 2023
• Journal: Fulbright Review of Economics and Policy
• Print ISSN: 2635-0173
• Publisher: Emerald
• Peer Reviewed: Peer Reviewed
• DOI: https://doi.org/10.1108/FREP-04-2022-0030
• Keywords: Clean energy stocks; Oil risk; Climate risk, Hedging; Forecast evaluation
• Public URL: https://hull-repository.worktribe.com/output/4254979