Dynamic Linkages and Hedging between Traditional Energy and Green Energy Subsectors under Heterogeneous Geopolitical Risk Shocks

Abstract

Using daily observations for West Texas Intermediate (WTI) crude oil futures, the solar ETF (TAN), and the wind ETF (FAN) from January 3, 2019 to December 31, 2025, this paper examines how heterogeneous geopolitical risk shocks reshape the linkages between traditional energy and green-energy subsectors and what these changes imply for hedging. The empirical framework combines marginal ARMA-GARCH models, dynamic conditional correlation generalized autoregressive conditional heteroskedasticity (DCC-GARCH) estimation, quantile regression, and hedging measures. The results show clear time variation and strong persistence in the correlation structure. After the escalation of the Russia-Ukraine conflict, the mean dynamic correlations of WTI-TAN and WTI-FAN decline from 0.1477 and 0.1566 to 0.1220 and 0.1081, respectively. Geopolitical Risk Act (GPRA) remains negative across quantiles, whereas Geopolitical Risk Threat (GPRT) is mainly significant in the lower and middle quantiles. In portfolio terms, wind works better as a baseline hedge in normal periods, while solar shows stronger relative hedging effectiveness during the Red Sea crisis. These findings remain broadly unchanged under an alternative distributional specification and after excluding the extreme observations in 2020.