Do alternative energy markets provide optimal alternative investment opportunities?

Abstract

This paper investigates diversification opportunities for investors among different alternative energy markets. We sample six alternative energy markets namely World, Developed, Emerging, EU, BRIC and G7 with daily data ranging from January 2006 to December 2017. For estimations, we use wavelet multiple correlation and wavelet multiple cross correlation proposed by Polanco-Martínez and Fernández-Macho (2014) to find pairwise correlation at different investment horizons. Our work contributes in measuring integration level among alternative regional energy markets across different investment horizons. Our results highlight that World, Developed, Emerging, EU markets offer maximum diversification when included with either Emerging or BRIC energy marketsin a portfolio. Furthermore, diversification benefits are more prominent under intra-week to monthly investment horizons for all portfolio combinations. We also rank different pairs of alternative markets based on their integration level which carry important implications for portfoliodiversification and risk management.