Clean energy indices and brown assets: an analysis of tail risk spillovers through the VAR for VaR model

ABSTRACT

This paper studies the dependence between the clean energy markets and brown assets (oil and Bitcoin) over the years 2011–2019. For this purpose, we use the VAR for VaR framework to capture the extreme dependence (tail risk). Moreover, we compute the Granger-causality in risk to study the impact of the Paris Agreement on these markets. We provide novel evidence of the relationship between the clean and oil markets. Notably, the results suggest that they are highly integrated in terms of risk spillover: their lagged returns, risks and extreme events influence both the VaRs of the clean energy sector and oil prices. Additionally, there is a symmetrical and an asymmetrical effect between returns and risks depending on market condition (downside/upside). The focus on the Paris Agreement demonstrates that this event is not neutral concerning the risk transmission. The effects of spillover from oil to clean energy are present before the agreement, while afterwards, we do not find evidence. Finally, the findings provide fresh insights into the relationship between clean energy and Bitcoin. The empirical analysis shows a significant spillover effect of extreme events between the two markets, suggesting a possible substitution effect.

KEYWORDS:

• Clean energy indices
• risk spillover
• sustainable investments
• VAR for VaR
• brown assets

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 I is a dummy variable that equals 1 when an extreme event occurs. Following Jian, Wu, and Zhu (2018), we change the definition of extreme events when $\theta =0.95$, from $r_{1(t-1)}\le q_{1(t-1)}$ to $r_{1(t-1)}\ge q_{1(t-1)}$.

2 We also carried out our analysis by using oil spot-price. The results are confirmed, and they are available on request.

3 See https://indexes.nasdaqomx.com/Index/Overview/GRNBIO.

4 See https://indexes.nasdaqomx.com/Index/Overview/GRNENEF.

5 Due to space limitations, we do not report the methodological aspects and results of the DCC model. However, they are available on request.