Harnessing Sunshine: A Dynamic Spillover Analysis of the Diversification Effects of China's Photovoltaic Weather Index

Abstract

This paper investigates the diversification effects of China's new photovoltaic weather index (PVWI) on commodity portfolios. Using a TVP-VAR spillover analysis, we find the PVWI is highly insulated from the commodity system, acting as a net shock receiver and confirming its diversification potential. We then construct novel “minimum-connectedness portfolios” (MCoP). Results show that portfolios incorporating the PVWI, particularly the MCoP, significantly enhance risk-adjusted returns and demonstrably outperform traditional minimum-variance benchmarks. This study validates the practical benefits of well-designed weather derivatives and the superiority of spillover-aware asset allocation frameworks.