Highlights

• Marco Tedeschi's study shows rare earth elements have lost their hedging capabilities in energy markets since 2022.
• REEs are now net receivers of financial shocks, challenging previous assumptions about portfolio stability.
• The research underscores the urgent need for diversification in rare earth production and financial risk management strategies.

A new study by Marco Tedeschi (opens in a new tab), Università Politecnica delle Marche, Department of Economics and Social Sciences, Italy (opens in a new tab),  (2025, Resources Policy) delivers a sobering message for investors and policymakers: rare earth elements (REEs) are no longer reliable hedges against financial volatility in energy markets. While REEs—especially neodymium, dysprosium, and praseodymium—are physically indispensable for clean energy technologies like wind turbines and electric vehicles, their financial utility as portfolio stabilizers has sharply deteriorated since the onset of the Russia–Ukraine conflict.

Using daily price data from 2013–2024 and applying a spillover and volatility transmission model (Diebold-Yilmaz framework), Tedeschi finds that REEs have shifted from being partial volatility insulators to net receivers of financial shocks. Before 2022, REEs exhibited consistent hedging behavior, providing downside protection to investors in renewable energy and energy portfolios. But after the geopolitical instability triggered by war in Ukraine, this buffering effect broke down. REEs became increasingly exposed to broader energy market shocks, particularly those originating in the fossil fuel and wind energy sectors.

This evolution is not merely academic. It holds weighty implications for global energy policy and investment strategies. The study confirms what many portfolio managers and supply chain analysts have suspected: financial decoupling between rare earths and broader energy markets is weakening. Investors betting on REEs for insulation against market turbulence must rethink their assumptions. More critically, policymakers counting on REEs as both physical and financial ballast in the energy transition must now confront a dual fragility—supply chain dependence on China and fading financial stability.

The study also reinforces the structural entanglement between rare earths and renewable energy performance. Strong co-movement between REE prices and wind energy indices suggests that REE supply disruptions—whether environmental, political, or logistical—will translate swiftly into volatility in renewables markets.

 For Western nations already concerned with China’s over 60% dominance in rare earth production and refining, the message is clear: diversification is no longer optional, not just in physical sourcing but also in financial hedging frameworks. The diminishing hedging utility of REEs adds urgency to building ex-China mining, refining, and trading platforms, as well as identifying alternative materials or instruments for risk management.

In short, REEs remain vital to the green transition, but no longer offer shelter in the financial storm.

Source: Marco Tedeschi (2025), Do Rare Earth Elements Hedge Financial Risk? A Spillover and Portfolio Analysis in the Context of the Energy Market (opens in a new tab), Resources

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