Harnessing Sunshine: A Dynamic Spillover Analysis of the Diversification Effects of China's Photovoltaic Weather Index

ABSTRACT This paper investigates the diversification effects of China's new photovoltaic weather index (PVWI) on commodity portfolios. Using a TVP‐VAR spillover analysis, we find the PVWI is highly insulated from the commodity system, acting as a net shock receiver and confirming its diversification potential. We then construct novel “minimum‐connectedness portfolios” (MCoP). Results show that portfolios incorporating the PVWI, particularly the MCoP, significantly enhance risk‐adjusted returns and demonstrably outperform traditional minimum‐variance benchmarks. This study validates the practical benefits of well‐designed weather derivatives and the superiority of spillover‐aware asset allocation frameworks.