Quantile time-frequency connectedness and portfolio diversification: A study of clean energy and metal markets

Abstract

Severe climate change has accelerated the shift towards renewable energy sources. In this study, we explore the spillover effects and portfolio diversification between clean energy and metal markets, using the quantile time-frequency analysis. Our analysis incorporates the quantile frequency connectedness framework, MODWT method, and DCC approach. The findings reveal the following key insights: (i) There exists significant spillover between clean energy and metal markets, characterized by dynamic patterns. Short-term spillover effects are particularly pronounced, contributing the most to overall connectivity. Interestingly, the conditional median-based measure underestimates spillover levels in extreme market conditions.(ii) Clean energy and base metal markets emerge as the primary net transmitters, while other strategic metal markets mainly act as net receivers.(iii) Optimal portfolio allocation for investors in clean energy metal portfolios suggests a higher proportion of wind energy assets compared to clean and solar energy assets. It is also recommended that investors adjust their portfolio structure and hedge positions according to market conditions. These findings carry crucial implications for investors and regulators in shaping their investment strategies and policies in response to the changing dynamics of clean energy and metal markets.