Oil price shocks and green investments: Upside risks, hedging, and safe-haven properties

Abstract

This study investigates the systemic risk spillover from various oil price shocks (demand, supply, and risk) to several green investments covering sustainable, ESG, clean technology, carbon market, clean energy, and green bonds and assesses the hedging and safe-haven roles of these green investments against oil shocks. Based on daily data from January 4, 2012 to September 20, 2022, oil prices are decomposed and a dynamic conditional correlation model is used to assess conditional value-at-risk (CoVaR) as a measure of upper risk spillover from each oil price shock to green investments. The hedging and safe-haven roles of the green investments are examined, especially during the COVID-19 pandemic and Russia-Ukraine conflict. The results show that all upper CoVaRs resulting from oil demand shocks exceed the investment’s upper tail VaRs during Phase 1 of COVID-19, indicating a significant oil demand shock risk spillover to all green investments. During Phase 2 of COVID-19 and the Russia-Ukraine conflict, only some investments are influenced by demand oil shocks. When oil supply and risk shocks rise, the upside risk of all green investments tends to be mitigated, suggesting that, during unstable periods, investors should seek green investments to mitigate the risk spillovers of these two oil shocks. Further analysis indicates that the majority of green investments serve as diversifiers for oil demand shocks, and act as hedges against oil supply and risk shocks. However, only a few of these green investments are strong safe havens.