Geopolitical Risk, Climate Risk and Financial Innovation in the Energy Market

24 Pages Posted: 29 Oct 2024

See all articles by Afees Salisu

Afees Salisu

affiliation not provided to SSRN

Abeeb Olaniran

Centre for Econometrics and Applied Research

Xuan Vinh Vo

University of Economics Ho Chi Minh City

Abstract

In this study, we look into how financial innovations, specifically Exchange-Traded Funds (ETFs) related to energy, can help hedge against geopolitical and climate-related risks. The research emphasizes the importance for investors to effectively manage these risks during periods of uncertainty. Our study aims to achieve two main objectives: firstly, to assess the potential for financial innovations in mitigating climate and geopolitical risks, and secondly, to compare their effectiveness with traditional defensive assets such as gold. We develop a predictive model tailored to our data's specific characteristics and find that energy-related ETFs can effectively hedge against both geopolitical and climate risks, with a particularly strong potential for geopolitical risk. Our results also show that ETFs outperform gold in hedging against these risks. Additionally, the forecast precision of our risk-based models against an alternative (or benchmark) model for both in- and out-of-sample periods are evaluated, and we find that the risk-based models better perform than the benchmark model, which does not consider these specific risks. These findings offer valuable insights for investors who are looking to hedge against risks like geopolitics and climate, distinct from broader market and economic fundamental risks such as inflation.

Keywords: Energy Market, Exchange-Traded Funds [ETFs], Financial innovation, geopolitical risk, Climate Risk, Hedging

Suggested Citation

Salisu, Afees and Olaniran, Abeeb and Vo, Xuan Vinh, Geopolitical Risk, Climate Risk and Financial Innovation in the Energy Market. Available at SSRN: https://ssrn.com/abstract=5002599 or http://dx.doi.org/10.2139/ssrn.5002599

Afees Salisu

affiliation not provided to SSRN

Abeeb Olaniran (Contact Author)

Centre for Econometrics and Applied Research ( email )

Ojetunji Aboyade House, Agodi Secretariat, Ibadan,
27, Ire-Akari Street, Boluwaji, Ibadan, Nigeria.
Ibadan, --- Select One --- PMB 105, U
Nigeria

Xuan Vinh Vo

University of Economics Ho Chi Minh City ( email )

Ho Chi Minh City, Ho Chi Minh City
Vietnam

HOME PAGE: http://www.ueh.edu.vn

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