article · Resources Policy
An examination using wavelet coherence and frequency connectedness techniques assesses the relationship and risk transmission between oil price shocks and green stocks across various time horizons. The findings show that connections between the oil and green equity markets are closer across medium- and long-term scales, although lead-lag behaviours vary over time. Risk spillovers originating from the oil market into green stocks are substantially larger than those in reverse, and overall risk transfers primarily unfold over time. Furthermore, major global shocks, including the Great Recession, oil price collapses, and the COVID-19 pandemic, significantly heighten the severity of these spillovers. Green equity markets have not yet established meaningful independence from traditional fossil energy markets, meaning that understanding time-frequency dependence provides essential guidance for portfolio managers.
Investors often turn to green equities expecting insulation from fossil fuel volatility, yet markets remain tightly linked. Recognising that green stocks still absorb significant risk from oil shocks, especially during crises, allows financial analysts, sustainable funds, and energy planners to build more resilient portfolios and accurately gauge real-world exposure across different time horizons.
The insights apply to institutional investors, portfolio managers, and financial analysts seeking to refine risk management and asset allocation strategies for sustainable funds. Because this is an analytical empirical study rather than a commercial tool or software, it represents early-stage decision-support evidence that practitioners can integrate into existing risk-modelling and hedging frameworks.
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This study uses wavelet coherence and frequency connectedness techniques to examine the time-frequency dependence and risk connectivity between oil shocks and green stocks. The results show that on mid-term and long-term scales, the dependence relationships between the oil and green stock markets are tighter while lead-lag patterns are mixed and time-varying. Total risk spillovers between the oil and green stock markets are mostly conveyed over time. Risk spillovers from the oil market are substantially larger in the green stock market. Furthermore, global crises such as the Great Recession, the oil price collapse, and the COVID-19 pandemic have substantially amplified the magnitude of risk spillovers. Overall, the green stock market has not yet developed enough potential for a larger independence from the conventional energy market. Hence, for participants in the energy and financial markets who have different time horizons for asset allocation and risk management and for committed investors in particular, the examination of time-frequency dependence and risk spillovers can be quite beneficial.
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DOI: 10.1016/j.resourpol.2023.103860
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