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Dynamic Connectedness and Hedging Opportunity Nexus between Clean Energy, Crude Oil and Technology Sector

Author(s): Tayfun YILMAZ, ?smail ÇEL?K, Feyyaz ZEREN, Sinan ESEN

In this paper, dynamic connectedness and time varying hedging opportunities between WilderHill clean energy ETF, West Texas Intermediate (WTI) crude oil and Arca Tech 100 ETFs were analyzed between 3 May 2005-22 October 2021. The volatility interdependency and conditional correlation nexus were investigated by TVP-VAR and DCCFIGARCH model with daily frequencies. TVP-VAR results prove that dynamic connectedness increases among assets, especially during periods of turbulence such as Covid-19. Furthermore, DCC-GARCH model results show that ETFs included in the analysis exhibit long memory properties. The conditional correlation between ECO and PSE is around 71%. The most important finding of the research is that long position risks arising in both ECO and PSE can be effectively and efficiently hedged with WTI. On the other hand, it was determined that WTI can be added to the portfolio in order to reduce the risks of portfolio to be established with clean energy and technology sector. Another remarkable result of the paper is that the simultaneous evaluation of ECO and PSE in portfolio strategies cannot contribute to risk minimization.

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