Scandinavian Working Papers in Economics

Working Papers,
Copenhagen Business School, Department of Economics

No 2-2022: Risk Transmission between Green Markets and Commodities

Muhammad Abubakr Naeem (), Sitara Karim (), Tooraj Jamasb () and Rabindra Nepal ()
Additional contact information
Muhammad Abubakr Naeem: Accounting and Finance Department, United Arab Emirates University, United Arab Emirates; South Ural State University, Russian Federation
Sitara Karim: Department of Business Administration, Faculty of Management Sciences, ILMA University, Karachi, Pakistan
Tooraj Jamasb: Department of Economics, Copenhagen Business School, Postal: Copenhagen Business School, Department of Economics, Porcelaenshaven 16 A. 1. floor, DK-2000 Frederiksberg, Denmark
Rabindra Nepal: School of Business, Faculty of Business and Law, University of Wollongong, Australia

Abstract: The current study examines the risk transmission between green markets and commodities spanning 3 January 2011 to 20 June 2021. We use two novel methodologies of volatility transmission using dynamic conditional correlation (DCC-GARCH) and the other time-varying parameters vector autoregression (TVP-VAR) technique of connectedness. We found parallel results of risk transmission between green markets and commodities using these measures of connectedness. Results demonstrate that green markets and commodities form a weakly knitted sphere of connectedness where intra-group clustering dominates the inter-group connectedness. Clean energy markets and precious metals form two distinct groups of connectedness for respective markets. However, crude oil, natural gas and wheat remained indifferent to the shocks highlighting their potential to serve as diversifiers due to their low risk bearing features. Further, time-varying dynamics emphasize the occurrence of sizable events that disrupted the operations of green and commodity markets, accentuating the attention of investors, portfolio managers, and financial market participants. Intense spillovers shaped the overall connectedness of the network where green markets (commodities) are fashioned in positive (negative) risk spillovers. Finally, we propose recommendations for policymakers, regulators, investors, portfolio managers, and market participants to devise policies and investment goals to shield their investments from unexpected circumstances.

Keywords: Green markets; Commodities; DCC-GARCH; TVP-VAR; Volatility transmission

JEL-codes: G10; G11; G19; Q01

Language: English

37 pages, February 24, 2022

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