Uncovering risk transmission between socially responsible investments, alternative energy investments and the implied volatility of major commodities

Muhammad Naeem Shahid, Wajahat Azmi, Mohsin Ali, Muhammad Umar Islam, Syed Aun R. Rizvi

Research output: Contribution to journalArticleResearchpeer-review

13 Citations (Scopus)


The interconnectedness and high integration among the global markets have reduced the portfolio diversification opportunities of international investors. In view of this, considering the rise of Socially Responsible Investments (SRI) and the Clean-Renewable energy & Clean-Technology energy (C&RTE) asset classes, the objective of this research is to examine risk transmission and the portfolio diversification prospects across the SRI, C&RTE, and the implied volatility indices (VIX) of major commodities (oil, silver, and the gold). To uncover the spillover and the risk transmission, we employ the approach of Dynamic conditional correlation (DCC-GARCH) along with the Asymmetric DCC-GARCH and VAR-GARCH. The findings exhibit a strong ability of volatility indices to hedge risks associated with SRIs and C&RTE investments as asymmetric-GARCH confirms that volatility indices have a negative correlation with most of the socially responsible and clean energy and technology equity indices. The findings confirm that the implied volatility indices of gold and silver exhibit the best hedging tool against SRIs while oil is the best hedging tool for C&RTE. During Covid-19, generally oil price volatility index is positively correlated with SRI indices whereas the silver and the gold volatility indices are negatively correlated with the C&RTE. More importantly, we find that hedging effectiveness and risk diversification are facilitated by the adaptive behavior of commodities, confirmed by the Adaptive Market Hypothesis (AMH) through the Generalized Spectral (GS) test. Moreover, we also find some evidence of a time-varying pattern in the hedging ratio and the hedging effectiveness. Finally, we show utility gains from hedging to be positive irrespective of whether we consider transaction costs or not. The findings of the study could be helpful for portfolio managers, brokers, and market participants to draw the role of implied volatilities of commodities in hedging the risk associated with SRIs and C&RTE investments.

Original languageEnglish
Article number106634
Number of pages44
JournalEnergy Economics
Publication statusPublished - Apr 2023


  • Clean energy indices
  • Commodities
  • Covid-19
  • Hedging effectiveness
  • Socially responsible indices
  • Time-varying predictability

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