Green finance and hedging in U.S. energy markets: evidence on volatility and policy insights

In this study, we investigate the relationship between crude oil prices and green and grey energy exchange-traded funds (ETFs). We use the Dynamic Conditional Correlation Generalized Autoregressive Conditional Heteroskedasticity (DCC-GARCH) model to estimate time-varying correlations and hedge ratios by using monthly data from 2008 to 2024. The findings show that the green energy ETF market experiences volatility spillovers from grey markets, suggesting that these investments are not isolated from the risks present in traditional energy markets. Hedging with oil futures or grey ETFs can reduce portfolio risk by 32% to 45%. Additionally, we conduct a comparative analysis of the hedging tools in terms of their effectiveness, including fossil fuel-based, broad market, and ESG-oriented hedging instruments. We find that inverse ETFs and oil derivatives are among the most effective tools for mitigating risk exposure. The research results enable us to develop specific recommendations that investors and policymakers can use to enhance green investment resilience through ESG-aligned derivative development and investment strategy implementation of dynamic risk management systems.