Time-Varying Spillover and the Portfolio Diversification Implications of Clean Energy Equity with Commodities and Financial Assets

ABSTRACT

This article examines the time-varying spillover and its implications on hedging and portfolio diversification for clean energy equities (WilderHill New Energy Global Innovation Index (NEX)) with technology stocks (PSE), four energy sub-indices of Standard & Poor Goldman Sachs Commodity Index (S&P-GSCI) viz., Crude oil, Brent crude oil, Gasoline and Heating oil and three major global equities indices represented by the USA, Europe, World, Dow-Jones Islamic Market Index (DJIMI) along with USD-Euro exchange rate. We find that in a mixed portfolio set-up, the inclusion of NEX in energy portfolio provides better diversification and risk reduction benefits for hedgers and portfolio managers.

KEY WORDS:

• clean energy stocks
• directional spillover
• dynamic conditional correlations
• oil prices

JEL CLASSIFICATION:

• G11
• G13
• Q42

Acknowledgments

We are thankful to the Ali Kutan (editor), and anonymous referees for helpful comments and suggestions.

Supplemental Materials

Supplemental data for this article can be accessed here.

Notes

1. PSE is a price-weighted index which consists of common stocks and American Depository Receipts of the technology companies listed in the USA stock exchange.

2. In the past following studies adopted this approach to analyse the different assets classes and market segments. The list includes Yilmaz (2009), Awartani and Maghyereh (2013), Sehgal, Ahmad, and Deisting (2014, 2015)), Narayan (2015), Chow (2017), Ahmad (2017), Ahmad and Sharma (2017), Ahmad, Rais, and Shaik (2018), Ahmad, Sharma, and Sadorsky (2018), Singh, Ahmad, and Mishra (2018).

3. Please refer for an insightful analysis of index-fund by Irwain and Sanders (2011).

4. The weight of each commodity index is decided based on the last five-year production figure. It is also considered as one of the barometers of global inflation because its movements decide the future course of global inflation. Like for example, during Jan.-April 2015, the decline in GSCI has given sufficient indication of global deflationary trend.

5. For more details, please refer to Abedifar et al. (2015).

6. DJIM is the world’s first Sharia-compliant equity benchmark. Since its launch in 1999, the index reported a relatively better financial performance than the major conventional equities benchmarks such S&P 500. The index has the highest weight of US equity landscape followed by Japan. The Sharia-screening has allowed the large number of technology and healthcare stocks in the index. For more detail, please refer to Ahmad, Rais, and Shaik 2018).

7. See also https://www.cnb.cz/en/monetary_policy/inflation_reports/2011/2011_II/boxes_and_annexes/zoi_II_2011_box_II.html (accessed on 4th November 2017).

8. http://www.nexindex.com/pdf/2016_09_30_NEX%20Factsheet.pdf (accessed on 1st November 2017). In recent years, the rise in uncertainty and volatility in the earnings of clean energy firms has been cited as the foremost reasons for the underperformance of clean energy firms. Please refer to Ahmad, Sharma, and Sadorsky (2018) for further discussion on this.

9. Ahmad (2017) review the literature extensively on clean energy firms. Please refer to the paper for further details.

10. We have considered WORLD-DS Market Index, US-DS Market Index and EUROPE-DS Market Index as defined by Thomson DataStream for World, USA and Europe, respectively.

11. The GSCI-Crude Oil represents the WTI crude oil futures contracts.

12. For further details, please see https://www.thomsonreuters.com/content/dam/openweb/documents/pdf/tr-com financial/methodology/global-equity-index-methodology-oct-2015.pdf (accessed on 5th March 2017).

13. We are thankful to the anonymous referee for the suggestion to include exchange rate in our analysis.

14. Following Zhang and Wang (2014) and Forsberg and Ghysels (2007), we have considered the absolute returns as the proxy of estimate the volatility spillover.

15. http://www.nexindex.com/pdf/2016_03_31_NEX%20Factsheet.pdf .

16. Please see https://www.weforum.org/agenda/2015/03/how-does-a-falling-oil-price-affect-exchange-rates/ (accessed on 1st November 2017).

17. RSI and VSI in Figure (2) denote the Total Return Spillover Index and Total Volatility Spillover Index, respectively.

18. For a detailed discussion, please go through Inchauspe, Ripple, and Trück (2015).

19. For details please see http://www.bloomberg.com/news/articles/2016-01-20/renewable-stocks-drop-after-oil-s-plunge-spurs-global-selloff (accessed on 24th September 2016).

20. To conserve the space, we have not reported the volatility spillover plots. As both graphs exhibit a large amount of similarity.

21. To conserve the space, we have not reported the ADCC results. However, the results are available upon request.

22. To conserve the space, the specification details of hedge ratio are mentioned in the supplementary material available online. See equation S1.

23. We are thankful to the anonymous referee for the valuable suggestion to incorporate these energy products into analysis and it has indeed help improve the quality of our work.

24. To conserve the space, the specification details are mentioned in the supplementary material available online. See equation S2.

Additional information

Funding

The generous financial support from the Office of Dean: Research and Development, Indian Institute of Technology Kanpur through grant # IITK/HSS/2015086 is gratefully acknowledged.