Managing risk and reaping rewards: Climate‐change futures as a game‐changer for energy futures markets

Abstract

Climate‐change futures provide a platform for low‐carbon portfolios and energy market risk hedging. Climate changes induce uncertainty in energy‐commodity markets. We investigate the potential of diversifying and hedging energy‐commodity market risk with climate‐change futures, using dynamic conditional correlation (DCC)‐ordinary least squares (OLS) incorporating quantile‐dummies and cross‐quantilogram (CQ) approaches. DCC‐OLS models reveal that the World and USA climate‐change futures exhibit that they can be diversifiers for oil, ethanol, gasoil, and gasoline. These futures also exhibit hedging features for natural gas, coal, and heating oil. Euro climate‐change futures demonstrate hedging capabilities for all energy commodities except oil and gasoil. World, USA, and Euro climate‐change futures have the potential to serve as safe‐haven financial instruments in the face of the high volatility of Brent crude oil, gasoil, and heating oil. The CQ reveals that World, USA, and Euro climate‐change futures exhibit hedging and safe‐haven capacity against oil, natural gas, coal, gasoil, gasoline, and heating futures. Climate‐change futures may protect financial investments during extreme volatility in energy commodities.