The hedging effect of green bonds on carbon market risk

This paper explores effective hedging instruments for carbon market risk. Examining the relationship between the carbon futures returns and the returns of four major market indices, i.e., the VIX index, the commodity index, the energy index and the green bond index, we find that the connectedness between the carbon futures returns and the green bond index returns is the highest and this connectedness is extremely pronounced during the market's volatile period. Further, we develop and evaluate hedging strategies based on three dynamic hedge ratio models (DCC-APGARCH, DCC-T-GARCH, and DCC-GJR-GARCH models) and the constant hedge ratio model (OLS model). Empirical results show that among the four market indices the green bond index is the best hedge for carbon futures and performs well even in the crisis period. The paper also provides evidence that the dynamic hedge ratio models are superior to the OLS model in the volatile period as more sophisticated models can capture the dynamic correlation and volatility spillover between the carbon futures and market index returns.     

On the dynamic dependence and investment performance of crude oil and clean energy stocks

This paper examines the directional spillover between crude oil prices and stock prices of technology and clean energy companies. The study uses the daily data over the period from May 2005 to April 2015. The estimated results exhibit following empirical regularities. First, it appears that technology stocks play vital role in the return and volatility spillovers of renewable energy stocks and crude oil prices. Second, technology (PSE) and clean energy indices (ECO) are the dominant emitters of return and volatility spillovers to the crude oil (WTI) prices. Third, the time and event-dependent movements are well captured by the directional spillover approach. Fourth, the application of directional spillover method seems to be more advantageous than MGARCH models as it not only establishes the inter-variables return and volatility spillovers but also helps in identifying direction of spillover through calculation of pairwise net spillovers. Last, the dynamic hedging results suggest that clean energy index can provide a profitable hedging opportunity in combination with crude oil futures than technology index. Many new findings further discussed and analysed.     

Higher-order moment risk connectedness and optimal investment strategies between international oil and commodity futures markets: Insights from the COVID-19 pandemic and Russia-Ukraine conflict

This paper investigates the higher-order moment risk connectedness between West Texas Intermediate (WTI) oil futures, Brent oil futures, Chinese oil futures and commodity futures (agricultural, industrial metals, and precious metals) before and during the COVID-19 pandemic and following the outbreak of the Russia-Ukraine conflict, by combining ex-post moment measures and the novel time-varying parameter (TVP)-vector auto-regression (VAR)-based connectedness approach. Further, this paper depicts the dynamic overall and pairwise correlations between oil and commodity futures and constructs the hedging and optimal-weighted portfolio strategies using the DCC-GARCH t-Copula model. This paper also constructs the multivariate oil-commodity portfolio based on the newly proposed minimum connectedness portfolio approach and takes into account the higher-order moment risk connectedness. The empirical results demonstrate that the dynamic linkages between international oil and commodity futures are positive, time-varying, and have been greatly intensified by the outbreak of the 2018 China-US trade war, the 2020 COVID-19 pandemic, and the 2022 Russia-Ukraine conflict. The risk connectedness results are moment-dependent. The averaged total skewness and kurtosis spillovers are lower than the return and volatility connectedness. Brent (WTI) oil is the largest net transmitter of the return and volatility (skewness and kurtosis) risk spillovers. The dynamic total, net, and net-pairwise spillovers are all time-varying and highly reactive to major crises, especially the COVID-19 pandemic and the Russia-Ukraine conflict. Furthermore, the optimal-weighted portfolio shows a higher risk reduction than the hedging strategy. Finally, the minimum skewness connectedness portfolio shows relatively higher hedging effectiveness, while the minimum kurtosis connectedness portfolio offers the highest cumulative returns.     

模糊厌恶下股指期货风险对冲策略设计及实证分析

投资者对股指期货与现货有着不同的模糊厌恶,本文首先将此假设条件引入带交易成本的Garleanu and Pederson (2013)投资模型中,并以指数基金对冲策略为例,构建了一个股指期货动态对冲的理论模型。与非对冲策略相比,基于上述模型设计的对冲策略投资绩效更好,动态最优成交额占目标交易额的比例更小,目标成交额对收益率预测因子的敏感性更大。借助上述模型,本文选取2010年4月至2021年6月的中国ETF指数基金和股指期货数据,并以2015年9月股指期货管理措施实施为界进行区间划分,实证研究发现:(1)中国A股市场的ETF投资组合进行股指期货对冲显著提升了投资绩效,但股指期货管理会削弱该作用;(2)投资绩效改善主要来源于交易成本的下降与目标成交额因子敏感性的提升,该机制受到股指期货管理的约束;(3)与Garleanu and Pederson (2013)、Zhang et al. (2017)相比,本文对冲策略保留“抗跌”特点的同时增加了“易涨”特性。本文研究结果表明,在当前大力发展机构投资者的背景下应不断丰富股指期货、股指期权产品谱系,降低股指期货交易成本并完善持仓约束。     

股指期货与股指期权套期保值组合的Delta中性动态模拟——基于沪深300股指期货仿真交易的分析

沪深300股指期货的推出,在为市场提供套保工具和流动性的同时,也带来新的风险。本文运用同一指数的股指期权与股指期货组成多种动态套期保值组合,分析股指期货的风险对冲策略。结果表明所构造的组合都能为股指期货提供有效的套期保值;不论多头股指期货还是空头股指期货,保护性策略的风险控制能力更强。     

Returns and volatilities of energy futures markets: Roles of speculative and hedging sentiments

This study examines how speculative and hedging sentiments influence the returns and volatilities of energy futures markets. We construct speculative and hedging sentiment indices based on the weekly data of fund and commercial positions of four energy futures: crude oil, heating oil, gasoline, and natural gas, traded on the New York Mercantile Exchange (NYMEX) from 15 January 2013 to 5 February 2019. Our study demonstrates that speculative sentiment generates greater market fluctuations in the energy futures markets than hedging sentiment; and, further, speculative sentiment stimulates a reversal effect on the returns of crude oil futures. Moreover, speculative sentiment exerts positive systemic risk compensation on the four futures' returns, whereas hedging sentiment alleviates volatilities in the energy futures markets. Most notably, distinguishing it from the leverage effect in stock markets, the speculative sentiment in the energy futures markets is influenced more by good than by bad news; while hedging sentiment exhibits emotional neutrality, as opposed to its impact on stock markets as reported in the literature. Additionally, the positive hedging sentiment in crude oil futures demonstrates significant systemic risk compensation, whereas the three other futures do not have an influence, confirming the prevalence of speculation in hedging transactions in crude oil futures. Our further analysis shows cross-market volatility spillover effects, among which speculative sentiment inherent in crude oil futures causes volatility spillovers to the three other futures, while hedging sentiment has no such effect. Our study has implications for overseeing international energy futures markets, providing regulators with evidence that will facilitate the development of effective strategies to strengthen market supervision.     

Modelling International Price Relationships and Interdependencies Between the Stock Index and Stock Index Futures Markets of Three EU Countries: A Multivariate Analysis

This paper addresses the important relationship between stock index and stock index futures markets in an international context. By simply examining the spot‐futures relationship within a single country as most of the extant literature does and thus ignoring possible market interdependencies between countries, the dynamics of price adjustments may be misspecified and thus findings misleading. The main contribution of the paper is to improve our understanding of the pricing relationship between spot and futures markets in the light of international market interdependencies. Using a multivariate VAR‐EGARCH methodology, the paper investigates stock index and stock index futures market interdependence, that is lead‐lag relationships and volatility interactions between the stock and futures markets of three main European countries, namely France, Germany and the UK. In addition, the paper explicitly accounts for potential asymmetries that may exist in the volatility transmission mechanism between these markets. The main conclusions of the paper imply that investors need to account for market interactions across countries to fully and correctly exploit the potential for hedging and diversification.     

引入国债期货合约能否发挥现货市场稳定效应?——基于中国金融周期的研究视角

我国国债期货市场能否发挥稳定现货市场功能,金融周期风险是否会改变国债期货市场对现货市场波动的影响,是投资者实施风险管理和监管部门构建市场稳定机制的重要依据。本文通过信息传递机制和交易者行为两个维度探析国债期货市场发挥稳定功能的微观机理,分析金融周期风险对衍生工具稳定功能的影响,解析引入国债期货合约能否缓解金融周期波动对国债市场冲击,同时关注我国国债期货交易机制改进与现券波动关系。研究发现:(1)我国国债期货市场已实现抑制现货市场波动的功能,金融周期风险会引发现货价格波动,国债期货市场能够降低金融周期的波动冲击;(2)改善现货市场深度和套保交易是国债期货市场发挥稳定功能的微观路径,国债期货市场增进国债预期交易量流动性、减弱非预期交易量干扰,金融周期低波动区间套保交易稳定作用受到抑制;(3)国债期货投机交易和波动溢出效应助长现货市场波动,正负期现基差对国债波动影响具有非对称特征。     

Shock and Volatility Transmission in the Futures and Spot Markets: Evidence from Turkish Markets

This paper examines the volatility transmission mechanism between the futures and corresponding underlying asset spot markets, focusing on Turkish currency and stock index futures traded on the lately established Turkish Derivatives Exchange (TURKDEX). Employing multivariate generalized autoregressive conditional heteroskedasticity modeling, which allows for potential spillovers and asymmetries in the variance-covariance structure for the market returns, the paper investigates the volatility interactions among each of the three futures-spot market systems. For all market systems under study, the volatility spillovers are found to be important and bidirectional. For the stock index market system, in line with the previous literature, volatility shows asymmetric behavior and strong asymmetric shock transmission. The main implication is that investors need to account for volatility spillovers and asymmetries among the futures and the spot markets to correctly build hedging strategies.     

A Likelihood Ratio Test of Price Volatilities: Comparing Stock Index Spot and Futures

This paper uses three methods to estimate the price volatility of two stock market indexes and their corresponding futures contracts. The classic variance measure of volatility is supplemented with two newer measures, derived from the Garman-Klass and Ball-Torous estimators. A likelihood ratio test is used to compare the classic variance measure of price volatilities of two stock market indexes and their corresponding futures contracts during the bull market of the 1980s. The stock market volatilities of the Standard & Poor's 500 (S&P 500) and New York Stock Exchange (NYSE) indexes were found to be significantly lower than their respective futures price volatilities. Since information may flow faster in the futures markets than in the corresponding stock market, our results support Ross's information-volatility hypothesis. It was also noted that the NYSE spot volatility was lower than the S&P 500 spot volatility. If the rate of information flow and firm size are positively related, then the lower NYSE spot volatility is explained by the size effect. The futures price volatilities for the two indexes were insignificantly different from each other. With stock index spot-futures price correlations approaching unity, one implication of our results for index futures activity is that smaller positions in futures contracts may suffice to achieve hedging or arbitrage goals.     

Time and frequency dynamics of connectedness and hedging performance in global stock markets: Bitcoin versus conventional hedges

Some studies have revealed the hedging ability of Bitcoin against stock markets, but the knowledge of how it compares with other hedges is in its infancy. This paper presents the first study on time-frequency domain connectedness and hedging among five hedges (Bitcoin, crude oil, commodities, gold and the U.S. dollar (USD) index) and four stock indices (developed markets ex U.S., emerging markets ex China, U.S. and China). We find that the connectedness between hedges and stock markets varies by time across time horizons. Specifically, the connectedness between Bitcoin and stock indices is the smallest among all hedges, especially for the short horizon. Gold and USD are isolated from other markets at longer horizons. The hedging ratio, optimal portfolio weights and hedging effectiveness also vary across investment horizons. For short-term investment, gold has better hedging effectiveness, especially for emerging stock markets and the U.S. stock market. For median- and long-term investment, USD has better performance, especially for developed markets ex U.S. and emerging stock markets. Additionally, although Bitcoin has good hedging properties, it has high volatility compared with other hedging assets. In other words, if Bitcoin is included in a portfolio, investors should pay attention to its wide variation. These empirical findings highlight the important role that gold and USD play in hedging against global stock markets.     

恒生指数和沪深300股指期货套期保值效果对比研究

本文利用OLS、ECM、ECM-GARCH模型对沪深300股指期货和恒生指数期货的最优套期保值率进行了估算,并在风险最小化框架下对它们的套期保值效果进行了对比研究。结果发现:无论是哪种股指期货,不考虑期现货间存在的协整关系会使估算的最优套期保值率偏高,影响套期保值效果;其次是虽然在样本内外,沪深300股指期货的套期保值效果比恒生指数期货的好,但是沪深300股指期货套期保值效果的稳定性比恒生指数差。此时,ECM-GARCH和OLS模型分别为样本内外投资者利用沪深300指数期货进行套期保值时的最佳选择;对于恒生指数股指期货,最优模型是ECM。     

Information connectedness of international crude oil futures: Evidence from SC,WTI, and Brent

The first Yuan (RMB) denominated crude oil futures contract, SC, was launched in the Shanghai International Energy Exchange (INE) on 26 March 2018, which is extremely meaningful for China and other Asian countries by offering a new option of oil price risk management. To identify the information connectedness among this emerging contract and those mature WTI and Brent oil futures, we provide return and volatility directional connectedness evidence among them in both the time and frequency domains. The empirical results show that, firstly the three oil futures of SC, WTI, and Brent present high degree of total connectedness in the return and volatility series, implying tight information transfer among them. Secondly, the net directional connectedness results suggest that the SC can provide competitive information on oil returns and is a net and powerful contributor to volatility shocks. In addition, from a frequency-specific perspective, we find that the SC appears to be not only a net transmitter of return shocks on the medium- and long-term frequencies but also a net transmitter of volatility shocks consistently across the whole frequency ranges. The overall evidence suggests that China's new oil futures is an active participant in the international oil futures market, and may become an important product in information transmission across international crude oil futures markets by providing effective hedging instrument for crude oil producers, refiners, consumers, and investors, especially those in Asia.     

Dynamic Hedging Effectiveness in South Korean Index Futures and the Impact of the Asian Financial Crisis

This paper focuses on the impact of the 1997 Asian financial market crisis upon hedging effectiveness within the KOSPI 200 stock index and index futures markets. The paper utilizes the inter-temporal relationship between the two markets to examine the characteristics of several minimum variance hedge ratios. It also examines the performances of alternative hedging strategies for dynamic portfolio management in the presence of cointegrated time-varying risks. The results show a decline in the persistence of conditional volatility within market prices after the crisis. This decline leads to the relative performance of utilizing constant hedge ratios to increase, though not significantly so to guarantee a superior performance over more sophisticated time-varying hedge ratio strategies.     

Cross hedging single stock with American Depositary Receipt and stock index futures

This paper investigates the cross hedging effectiveness of individual stock in a market that does not have single stock futures traded using American Depositary Receipt (ADR) and stock index futures. We apply Caporin and Billio’s Multivariate regime switching GARCH to capture the state-dependent covariance structure of underlying stock, ADR and stock index futures. Empirical results indicate that in general simultaneous hedging with both ADR and index futures creates hedging gains and incorporating regime switching effects further increases the hedging performances.     

Hedging Corporate Bonds

We examine Treasury bond and stock index futures, the swap curve and two types of hypothetical corporate bond assets as alternative hedging instruments for portfolios of corporate bonds. Conducting ex post and ex ante tests we find evidence that credit quality and maturity are important sources of basis risk when hedging corporate bonds whose credit rating are below triple A. We conclude that a new corporate hedging instrument may be useful for those wishing to hedge corporate bond portfolios provided that transaction costs are not too high relative to existing futures contracts.     

基于多元随机波动模型方法的股指期货与现货关系研究——以亚洲五地金融市场为例

本文以多元随机波动模型检视亚洲五个主要金融市场股指期货与现货的报酬关系与波动溢出效应。实证发现,五地金融市场股指期货与现货之间皆存在双向的波动溢出效应。股指现货动态相关系数和波动持续系数均高,显示现货市场具有聚类的现象。此外,本研究进一步探讨股指期货与现货的联动和共同波动因子的关系,实证发现,股指期货与现货的波动关系是同时受到共同信息发布的影响。     

Dynamic spillover effects among green bond,renewable energy stocks and carbon markets during COVID-19 pandemic: Implications for hedging and investments strategies

This study has been inspired by the emergence of socially responsible investment practices in mainstream investment activity as it examines the transmission of return patterns between green bonds, carbon prices, and renewable energy stocks, using daily data spanning from 4th January 2015 to 22nd September 2020. In this study, our dataset comprises the price indices of S&P Green Bond, Solactive Global Solar, Solactive Global Wind, S&P Global Clean Energy and Carbon. We employ the TVP-VAR approach to investigate the return spillovers and connectedness, and various portfolio techniques including minimum variance portfolio, minimum correlation portfolio and the recently developed minimum connectedness portfolio to test portfolio performance. Additionally, a LASSO dynamic connectedness model is used for robustness purposes. The empirical results from the TVP-VAR indicate that the dynamic total connectedness across the assets is heterogeneous over time and economic event dependent. Moreover, our findings suggest that clean energy dominates all other markets and is seen to be the main net transmitter of shocks in the entire network with Green Bonds and Solactive Global Wind, emerging to be the major recipients of shocks in the system. Based on the hedging effectiveness, we show that bivariate and multivariate portfolios significantly reduce the risk of investing in a single asset except for Green Bonds. Finally, the minimum connectedness portfolio reaches the highest Sharpe ratio implying that information concerning the return transmission process is helpful for portfolio creation. The same pattern has been observed during the COVID-19 pandemic period.     

Does the connectedness among fossil energy returns matter for renewable energy stock returns? Fresh insights from the Cross-Quantilogram analysis

The response of renewable energy stock returns to the dynamics of fossil energy markets is a vital concern of low-carbon transitions. There is still sparse literature documenting the directional dependence of renewable energy stock returns on the connectedness among fossil energy returns, even though previous studies have examined the relationship among renewable energy stocks and fossil energy markets. Additionally, the conclusions of prior studies are quite far from reaching a consensus regarding the relationship between the renewable energy stock and the fossil energy markets. To this end, by using the TVP-VAR based connectedness approach and Cross-Quantilogram techniques, this study does the first attempt to unpack the complicated and controversial directional dependence of renewable energy stock returns on the returns and connectedness of fossil energy markets, considering various market conditions and time horizons. The empirical analysis demonstrates that, first, the directional dependence of renewable energy stock returns on fossil energy returns is pronounced during extreme market conditions, whereas they appear to be decoupled from fossil energy returns during normal market conditions. Second, the total connectedness between fossil energy returns transmits a substantial shock to renewable energy stock returns during most market conditions, which is in stark contrast to the information transmission directly originating from fossil energy markets. The performance of renewable energy stock markets improves with stronger fossil energy return connectedness, whereas weaker fossil energy return connectedness hinders it. Additionally, further study reveals that the directional dependence of renewable energy stock returns on the net connectedness of the crude oil market is dominated by negative dependence when the net connectedness of the crude oil market is low, whereas it displays positive dependence when the net connectedness of the crude oil market is high. This directional dependence pattern on the net connectedness of the crude oil market is opposite to that exhibited in the net connectedness of the coal and natural gas markets. Third, in general, the directional dependence of renewable energy stock returns on fossil energy returns is more pronounced in the short term but diminishes over the medium and long terms. Conversely, the directional dependence of renewable energy stock returns on fossil energy return connectedness persists over the medium and long terms. Final, with the outbreak of the Global Financial Crisis during 2007–2008, we notice an abrupt jump in the directional dependence of renewable energy stock returns on fossil energy returns and their connectedness, particularly during extreme market conditions. Our findings provide noteworthy implications for energy transformation, energy security, and climate mitigation.     

Analyzing hedging strategies for fixed income portfolios: A Bayesian approach for model selection

During the recent European sovereign debt crisis, returns on EMU government bond portfolios experienced substantial volatility clustering, leptokurtosis and skewed returns as well as correlation spikes. Asset managers invested in European government bonds had to derive new hedging strategies to deal with changing return properties and higher levels of uncertainty. In this environment, conditional time series approaches such as GARCH models might be better suited to achieve a superior hedging performance relative to unconditional hedging approaches such as OLS. The aim of this study is to test innovative hedging strategies for EMU bond portfolios for non-crisis and crisis periods. We analyze single and composite hedges with the German Bund and the Italian BTP futures contracts and evaluate the hedging effectiveness in an out-of-sample setting. The empirical analysis includes OLS, constant conditional correlation (CCC), and dynamic conditional correlation (DCC) multivariate GARCH models. We also introduce a Bayesian composite hedging strategy, attempting to combine the strengths of OLS and GARCH models, thereby endogenizing the dilemma of selecting the best estimation model. Our empirical results demonstrate that the Bayesian composite hedging strategy achieves the highest hedging effectiveness and compares particularly favorable to OLS during the recent sovereign debt crisis. However, capturing these benefits requires low transactions cost and efficiently functioning futures markets.