The Energy Sustainability Advantage: Dynamic Connectedness and Portfolio Management Among Clean Energy, Crude Oil, and GCC Equity Markets

Abstract

This paper examines the risk dependence between clean energy, oil prices and GCC stock markets over the period 2013–2023, covering the two recent events of the COVID-19 pandemic and Russia-Ukraine conflict. The main purpose is to investigate the volatility spillovers between clean energy, fossil fuel markets and GCC stock indices. We employ two methodologies namely the Diebold, F. X., and K. Yilmaz. 2012. “Better to Give than to Receive: Predictive Directional Measurement of Volatility Spillover.” International Journal of Forecasting 28: 57–66, Diebold, F. X., and K. Yilmaz. 2014. “On the Network Topology of Variance Decompositions: Measuring the Connectedness of Financial Firms.” Journal of Econometrics 182: 119–34, Diebold, F. X., and K. Yilmaz. 2015. “Trans-Atlantic Equity Volatility Connectedness: U.S. and European Financial Institutions, 2004-2014.” Journal of Financial Econometrics 14: 81–127 volatility spillover index and wavelet coherence analysis. The Diebold-Yilmaz connectedness results show that oil prices, KSA and Kuwait stock markets are net transmitters of shocks while the clean energy index and the stock markets of the UAE, Qatar, Bahrain and Oman are net receivers of volatility. The wavelet coherency findings reveal that the dependence between clean energy/oil prices and the stock markets varies across time scales and countries. Strong coherence is observed during the oil price crash and the COVID-19 crisis at low frequencies (high scales). The findings have several practical implications for investors and portfolio managers. The results suggest that GCC investors may benefit from including either clean energy or crude oil in their stock portfolios to reduce portfolio risk. The estimated hedge ratios indicate that both clean energy and crude oil can serve as effective hedging instruments. Moreover, the hedging effectiveness results show that incorporating clean energy, rather than crude oil, into stock portfolios leads to a greater reduction in portfolio risk.