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Hedging strategies among financial markets: the case of green and brown assets.

Ibrahim D RaheemOluyele AkinkugbeAgboola H YusufMahdi Ghaemi Asl
Published in: Empirical economics (2023)
Recognizing the growing importance of the green energy market-renewable energy stocks and bonds-and its classification as a viable financial asset, this paper examines hedging strategies with brown market instruments-gold, oil, bond and the composite S&P500-on the green energy markets. That is, we examine whether, and to what extent brown assets can provide a hedge for green assets, using variants of the multivariate GARCH framework (DCC, ADCC and GO-GARCH). Our dataset spans the period 01/12/2008 to 30/09/2021. To account for the influence of the COVID-19 pandemic, we split the dataset into two-pre-covid (1/12/2008-10/03/2020) and covid-era (11/03/202-30/09/2021). Two key findings emanate from our results: first, conventional bonds and stocks provide the most consistent hedge for investment in the green markets. Second, the results are sensitive to the state of the market-hedging effectiveness declined during the covid period in the green stock market. Among other things, it is recommended that investors include instruments of the green market in portfolio allocation.
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