Rare Earth Market, Electric Vehicles and Future Mobility Index: A Time-Frequency Analysis with Portfolio Implications

Abstract

This study investigates the co-movements between the Solactive Electric Vehicle and Future Mobility Index (EVFMI) and multiple rare earth elements (REEs). We applied a TVP-VAR model and bivariate wavelet coherence approach to capture co-movements both in the time and frequency domain considering short-, medium- and long-term investment horizons. Using daily returns from 1 June 2012 to 4 June 2021, the results of the TVP-VAR model show that individual REEs and the EVFMI have strong return connectedness and are heterogenous over time. The bivariate wavelet coherence approach reveals that Dysprosium, Neodymium, Praseodymium and Terbium returns have positive co-movement (in-phase) with the EVFMI in the medium-term and long-term. In contrast, Cerium, Europium, Lanthanum and Yttrium returns have negative co-movements (out-phase) with the EVFMI in the medium-term and long-term. We find strong positive co-movements between the MVIS Global Rare Earth/Strategic Metals Index (MVREMX) and EVFMI at multiple wavelet scales. Following the lead/lag relationship, Cerium, Europium and Lanthanum, Yttrium returns are leading the EVFMI, and Neodymium, Dysprosium, Praseodymium, Terbium and MVREMX returns are lagging to the EVFMI. This study, therefore, suggests heterogenous hedging and diversification properties of REEs over time and investment horizons. Specifically, Cerium, Europium, Lanthanum and Yttrium act as strong hedges in long-term investment horizons and Neodymium, Dysprosium, Praseodymium and Terbium are weak hedges or diversifiers in short-term investment horizons. These results may be of particular interest to investors and relevant to policymakers considering multiple investment horizons.

Keywords

• electric vehicles
• future mobility
• rare earths
• hedge
• diversifier
• TVP-VAR