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Energy Sector at the Prospect of Asset Stranding. Hedging the Default Risks of Traditional Energy Producers.

Student: Kuznetsova Mariia

Supervisor: Sylvain Carré

Faculty: International College of Economics and Finance

Educational Programme: Double degree programme in Economics of the NRU HSE and the University of London (Bachelor)

Year of Graduation: 2021

This paper examines the effectiveness of several financial instruments in hedging the default risk of traditional energy companies. This risk is gradually made possible by a global energy transition to renewable sources, which entails the stranding of carbon-based assets. In this research, the risk is represented by a set of carbon-intensive futures and stocks. Four hedging instruments are assessed with two models – a rolling-window OLS model and a DCC-GARCH model. The results of empirical estimation show that most of the considered hedging tools do not lead to a sufficient portfolio variance reduction to be deemed effective. Among the considered hedging instruments, green bonds and commodities are found to be the least effective instruments. In case of traditional energy stocks, low carbon and clean energy indices demonstrate a higher hedging potential both in tranquil and unstable periods in global economy. There is also an evidence of a relatively high cost of the low carbon index for investors, leading to a conclusion that only the clean energy index can offer effective hedging opportunities against carbon risk.

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