• Energy Research

Abstract Volatility is a key determinant of derivative prices and optimal hedge ratios. This paper examines whether there are structural breaks in commodity spot return volatility using an iterative cumulative sum of squares procedure and then uses GARCH (1,1) to model volatility during each regime. The main empirical finding is the very limited evidence of commodity volatility breaks during the recent financial crisis. This suggests commodity return volatility was not exceptionally high during the recent financial crisis compared to the 1985–2010 sample period as a whole. For many commodities there are multiple idiosyncratic breaks in volatility; this suggests commodity specific supply or demand factors are important determinants of volatility. The empirical results overall are consistent with the view that commodities are too diverse to be considered as an asset class. Finally, we find commodity volatility persistence remains very high for many commodity returns even after structural breaks are accounted for.

Abstract Carbon allowances are a new class of financial instrument which aim to assist in limiting the extent and impact of global warming and climate change. The feedback mechanism in the “Carbon-Energy-Finance” system makes the information connectedness dynamics more complex since we add equity, bond and non-energy commodity assets into the system. Using modified error variance decomposition and network diagrams, we quantify and systematically analyze how the European carbon market connects with information from a wide range of other markets. Our results indicate: (i) the nature of information spillover changes over time, with system-wide return connectedness being higher and more variable than the volatility interdependence; (ii) both the oil and carbon markets closely connect with equity and non-energy commodity markets rather than bond markets; (iii) we identify three structural breaks in carbon volatility and their implication for carbon-finance linkages; (iv) financial risk-type macroeconomic factors make greater contributions to system-wide connectedness than commodity factors. These findings have economic implications for investors, portfolio managers and policymakers.

This paper examines the relationship between the energy and equity markets by estimating volatility impulse response functions from a multivariate BEKK model of the Goldman Sach's Energy Index and the SP in addition, we also calculate the time varying conditional correlations and time varying dynamic hedge ratios. From volatility impulse response functions, we find that low SP however, we find only a weak response from S&P 500 volatility to energy price shocks. Moreover, our dynamic hedge ratio analysis suggests that the energy index is generally a poor hedging instrument.

Abstract Increasing concern about the challenges of climate change has triggered rapid growth of private investment into clean energy sectors. Currently, the uncertain global economic environment makes the risk spillovers in the “Oil-Clean energy stocks” system a vital topic to explore. Using a systematic framework involving both Spillover index and Multivariate quantile models, this paper aims at revealing the heterogeneous risk transmission mechanisms between WTI oil futures and 12 clean energy stock indexes over the period of October 2010 to August 2020 from a systematic perspective by considering both regular and extreme conditions. We find asymmetric and time-varying features in the connections between oil and clean energy. The main findings include: (1) responses of extreme downside risks are substantially intensified compared to normal and upside risks; (2) the (downside) VaR response of oil to shocks of clean energy stocks is greater when the oil price is low; (3) the (downside) VaR response of clean energy to oil shocks is heterogeneous especially when the oil price is low. We also find that oil market is a net volatility receiver from clean energy sector overall and especially from the Advanced material and Energy efficiency groups. However, oil is a risk trigger for the Renewable energy group. These findings have significant and abundant implications for investors, portfolio managers, and policymakers to inform their decision-making and promote clean energy investment.