Rare earth elements in the clean energy transition: Hedge effectiveness and safe haven properties

Abstract

This study investigates the dynamic relationship between rare earth elements (REEs) and clean energy stocks, focusing on their association with geopolitical and economic stress, and the escalating demand for clean energy solutions from January 2015 to May 2024. We assess whether REEs are a hedge and/or safe haven asset for the clean energy market and analyze their time-varying hedging effectiveness and hedge ratios. Our analysis suggests a strong non-linear correlation between the markets examined. REEs exhibit a strong positive correlation with clean energy stocks under normal conditions, but this relationship weakens during extreme market volatility. However, REEs show a significant positive correlation with the wind subsector during certain extreme market shocks. This suggests that REEs do not function as a hedge for the clean energy market and do not demonstrate safe haven behavior, especially for the wind subsector during turbulent times. REEs exhibit weak hedging effectiveness, particularly during the United States-China trade tensions, but perform better during the COVID-19 pandemic and other crises. Comparatively, REEs outperform Bitcoin but underperform gold in hedging effectiveness across all subsamples and the full sample analysis. The hedge ratios for REEs vary across subsamples and peak for gold and Bitcoin during the COVID-19 pandemic and the Russia-Ukraine war. Our empirical evidence underscores the vulnerabilities and investment risks of REEs in the clean energy transition. This study provides novel insight for investors and policymakers navigating the complexities of the global energy transition.