Asymmetric volatility spillover between clean energy and nonferrous metal markets under climate risks: Portfolio hedging implications

Abstract

Although extensive research has been conducted on the risk spillover between clean energy and the non-ferrous metals markets, there has been limited discussion on the role of asymmetric volatility spillover and climate risks in this context. This paper integrates semivariance decomposition with a Tail Event-driven NETwork (TENET) to assess both negative (bad) and positive (good) volatility spillovers in the clean energy and non-ferrous metals markets. The study considers both climate transition and physical risks within the flexible, high-dimensional TENET framework. We find that the patterns of negative and positive volatility spillovers between clean energy and non-ferrous metals markets exhibit significant asymmetry in network structure and dynamics, as evidenced by the total connectedness index. Additionally, we confirm that incorporating physical and transition risks is crucial in analyzing volatility spillovers in these markets. Finally,the portfolio implications underscore the informational and economic value of asymmetric volatility spillover analysis. The findings of this study may have practical implications for policymakers aiming to enhance risk early warning systems and could assist investors in portfolio management.