The Effects of Global Volatility Indices on Green and Fossil Energy Markets
Cagli, Efe Caglar; Evrim Mandaci, Pinar; Tedik Kocakaya, Birce
Year: 2025 Volume: 75 Issue: 3 Pages: 277-302
Abstract: Uncertainties cause significant fluctuations in financial markets. Energy markets are more susceptible to uncertainties because of their strategic importance. This paper examines connectedness among various implied volatility indices (stock, oil, gold, currency), green markets (green stocks, bonds), and fossil energy commodities (natural gas, oil, heating oil, gasoline) from November 2, 2012, to July 25, 2023, by employing Chatziantoniou et al. (2023)’s TVP-VAR model. We use Broadstock et al. (2022)’s Minimum Connectedness Portfolio technique to construct optimal portfolio weights and hedge ratios. Our findings reveal moderate interdependence, with an increase during the pandemic. Short- and long-term factors are equally significant in this connectedness. All volatility indices are volatility transmitters, while energy markets are recipients. We provide important implications for investors interested in energy markets and aiming at constructing optimal hedging strategies, as well as for policymakers aiming to develop policies to stabilize energy prices and increase the effectiveness of green markets.
JEL classification: C32; F3; G12; Q43
Keywords: Volatility indices; Green markets; Fossil energy markets; TVP-VAR Model; Connectedness
DOI: https://doi.org/10.32065/CJEF.2025.03.02
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