Hedging across scales: Examining episodic or sustained strategies for energy, technology, and carbon portfolios

A global platform for discussing net zero targets and climate change is underway; however, only a few economies have made this notable. Adopting nonlinear models such as wavelet and Breitung and Candelon's (2006) frequency-based causality, this study examines the relationship between energy (including renewable and non-renewable) and fundamentally related markets, such as carbon and technology. Wavelets efficiently handle non-stationarity and multiscale investor behavior. The analysis spans ten years from 2014 to 2024, encompassing significant market upheavals, such as the COVID-19 crisis and the Russia-Ukraine war. Findings reveal that, wind energy offers better diversification advantage than solar due to the sporadic patterns of co-movement with others (natural gas, coal, and carbon). The technology stock exhibits sustained co-movement across different time periods and investment horizons. To highlight the episodic nature of hedging strategies, this study deployed the Generalized Sharpe Ratio (GSR) to compare equally weighted, minimum-risk, and hedged portfolios. The equally weighted portfolios performed well during the COVID-19 crisis, and hedged portfolios performed well during the Russia-Ukraine war. Renewable energy performed better in COVID-19 than Russia-Ukraine war. Overall, insights about portfolio rebalancing, scale-specific diversification strategies, and optimizing carbon emissions management plans for portfolio managers, investors, and industry practitioners can be drawn.