Investment modeling between energy futures and responsible investment

• Published in: Research in international business and finance 2024-06, Vol.70, p.102373, Article 102373
• Main Authors: Soni, Rajat Kumar, Nandan, Tanuj, Sawarn, Ujjawal
• Format: Article
• Language: English
• Subjects: DCC-GARCH; Energy futures; Hedge ratio; Responsible investment; Wavelet Coherence plots
• ISSN: 0275-5319; 1878-3384
• DOI: 10.1016/j.ribaf.2024.102373

This research examines the hedging and diversification ability of energy futures (crude oil, heating oil, natural gas, gasoline, carbon) concerning investment in four different segments of responsible investment. Wavelet coherence and DCC-GARCH are used to inspect the association and volatility transmission between them. Conditional correlation, optimum portfolio weights and hedge ratios are also calculated for real-time data and decomposed series to analyze the optimum portfolio structure. Our analysis reveals that energy futures are more efficient as a hedge to responsible investment during the short-run period. Natural gas is the perfect hedge against all the segments of responsible investment. Each segment of energy futures can hedge investments in sustainability stocks and green bonds. Carbon and Gasoline are not the perfect hedge for ESGL and GCEI but can be used as a cheap hedge. Our study will help responsible investors to hedge their portfolio risk using related assets, countering their familiarity bias. [Display omitted] •Energy futures are more efficient as a hedge to responsible investment during the short-run period.•Natural gas can be used as a perfect hedge against each segment of responsible investment.•All energy futures can be used as a hedge against the investment made in sustainability stocks and green bonds.•Carbon and Gasoline are not a perfect hedge for ESGL and GCEI but can be used as a cheap hedge.•Crude and heating oil are safe haven and perfect hedge against ESG & GCEI stocks during significant rise in crude oil prices.