Using machine learning to forecast clean energy, commodities, green bonds and ESG index prices: How important is financial stress?

Abstract

Purpose

This study investigates clean energy, commodities, green bonds and environmental, social and governance (ESG) index prices forecasting and assesses the predictive performance of various factors on these asset prices, used for the development of a robust forecasting support decision model using machine learning (ML) techniques. More specifically, we explore the impact of the financial stress on forecasting price.

Design/methodology/approach

We utilize feature selection techniques to evaluate the predictive efficacy of various factors on asset prices. Moreover, we have developed a forecasting model for these asset prices by assessing the accuracy of two ML models: specifically, the deep learning long short-term memory (LSTM) neural networks and the extreme gradient boosting (XGBoost) model. To check the robustness of the study results, the authors referred to bootstrap linear regression as an alternative traditional method for forecasting green asset prices.

Findings

The results highlight the significance of financial stress in enhancing price forecast accuracy, with the financial stress index (FSI) and panic index (PI) emerging as primary determinants. In terms of the forecasting model's accuracy, our analysis reveals that the LSTM outperformed the XGBoost model, establishing itself as the most efficient algorithm among the two tested.

Practical implications

This research enhances comprehension, which is valuable for both investors and policymakers seeking improved price forecasting through the utilization of a predictive model.

Originality/value

To the authors' best knowledge, this marks the inaugural attempt to construct a multivariate forecasting model. Indeed, the development of a robust forecasting model utilizing ML techniques provides practical value as a decision support tool for shaping investment strategies.

Citation

Soltani, H., Taleb, J., Ben Hamadou, F. and Boujelbène-Abbes, M. (2024), "Using machine learning to forecast clean energy, commodities, green bonds and ESG index prices: How important is financial stress?", EuroMed Journal of Business, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/EMJB-12-2023-0341