The Effects of Global Volatility Indices on Green and Fossil Energy Markets

Abstract

Uncertainties cause significant fluctuations in financial markets. Energy markets are more susceptible to uncertainties because of their strategic importance. This paper examines connectedness among various implied volatility indices (stock, oil, gold, currency), green markets (green stocks, bonds), and fossil energy commodities (natural gas, oil, heating oil, gasoline) from November 2, 2012, to July 25, 2023, by employing Chatziantoniou et al. (2023)'s TVP-VAR model. We use Broadstock et al. (2022)'s Minimum Connectedness Portfolio technique to construct optimal portfolio weights and hedge ratios. Our findings reveal moderate interdependence, with an increase during the pandemic. Short-and longterm factors are equally significant in this connectedness. All volatility indices are volatility transmitters, while energy markets are recipients. We provide important implications for investors interested in energy markets and aiming at constructing optimal hedging strategies, as well as for policymakers aiming to develop policies to stabilize energy prices and increase the effectiveness ofgreen markets.