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Optimal hedge ratios for clean energy equities

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  • Ahmad, Wasim
  • Sadorsky, Perry
  • Sharma, Amit

Abstract

Clean energy equities represent a relatively new class of assets to invest in, and these assets can be very volatile. An understanding of how investors in clean energy stocks can hedge their investment is essential for risk management. In this study, we use daily data covering the period March 03, 2008 to October 31, 2017, to examine how crude oil, US-bonds, gold, VIX, OVX and European carbon prices can be used to hedge an investment in clean energy equities. We apply three variants of multivariate GARCH models (DCC, ADCC and GO-GARCH) to estimate time-varying optimal hedge ratios. The results suggest that VIX is the best asset to hedge clean energy equities followed by crude oil and OVX. This is a new result relative to the existing literature on clean energy stock prices and one that is of interest to current and future investors in clean energy stocks.

Suggested Citation

  • Ahmad, Wasim & Sadorsky, Perry & Sharma, Amit, 2018. "Optimal hedge ratios for clean energy equities," Economic Modelling, Elsevier, vol. 72(C), pages 278-295.
    • Handle: RePEc:eee:ecmode:v:72:y:2018:i:c:p:278-295
    DOI: 10.1016/j.econmod.2018.02.008
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    More about this item

    Keywords

    Clean energy equities; Crude oil; Multivariate GARCH; Optimal hedge ratios; VIX;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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