Dynamic Asymmetric Optimal Portfolio Allocation between Energy Stocks and Energy Commodities: Evidence from Clean Energy and Oil and Gas Companies

65 Pages Posted: 4 Sep 2020

See all articles by Mahdi Ghaemi Asl

Mahdi Ghaemi Asl

Kharazmi University, Faculty of Economics, Tehran, Iran.

Giorgio Canarella

University of Nevada, Las Vegas

Stephen M. Miller

University of Nevada, Las Vegas - Department of Economics; University of Connecticut - Department of Economics

Date Written: July 26, 2020

Abstract

This paper investigates returns and volatility transmission between SPGCE (index of clean energy stocks), SPGO (index of oil and gas stocks), two non-renewable energy commodities (natural gas and crude oil), and three products of crude oil distillation (heating oil, gasoline, and propane). We estimate a VAR(1) asymmetric BEKK-MGARCH(1,1) using daily U.S. data from March 1, 2010, to February 25, 2020. The empirical findings reveal a vast heterogeneity in spillover patterns of returns, volatilities, and shocks. We employ the empirical results to derive optimal portfolio weights, hedge ratios, and effectiveness measures for SPGCE and SPGO diversified portfolios. We find dynamic diversification advantages of energy commodities, especially heating oil, for energy-related stock markets. We also find that SPGCE and SPGO stocks possess the highest average optimal weight and hedging effectiveness for each other, implying that the positive performance of SPGCE stocks considerably compensates for the negative performance of SPGO stocks. For investors and regulators, the advancement and implementation of clean energy programs and policies, while reducing environmental debt and enhancing “green” growth and sustainable development, provide instruments and strategies to hedge the equity risks inherent in the oil and gas industry.

Keywords: Clean energy stocks, Oil and gas stocks, Asymmetric BEKK, Dynamic Optimal Portfolios

JEL Classification: Q43, G11, C33

Suggested Citation

Asl, Mahdi Ghaemi and Canarella, Giorgio and Miller, Stephen M., Dynamic Asymmetric Optimal Portfolio Allocation between Energy Stocks and Energy Commodities: Evidence from Clean Energy and Oil and Gas Companies (July 26, 2020). Available at SSRN: https://ssrn.com/abstract=3660959 or http://dx.doi.org/10.2139/ssrn.3660959

Mahdi Ghaemi Asl (Contact Author)

Kharazmi University, Faculty of Economics, Tehran, Iran. ( email )

No 43, Mofateh Avenue, Tehran, Iran.
Tehran, Tehran 31979-3755
Iran
+989122512128 (Phone)

Giorgio Canarella

University of Nevada, Las Vegas ( email )

4505 S. Maryland Parkway
Box 456005
Las Vegas, NV 89154-6005
United States

Stephen M. Miller

University of Nevada, Las Vegas - Department of Economics ( email )

4505 S. Maryland Parkway
Box 456005
Las Vegas, NV 89154
United States
702-895-3776 (Phone)
702-895-1354 (Fax)

HOME PAGE: http://faculty.unlv.edu/smiller/

University of Connecticut - Department of Economics

365 Fairfield Way, U-1063
Storrs, CT 06269-1063
United States

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