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Diversification effects of China's carbon neutral bond on renewable energy stock markets: A minimum connectedness portfolio approach

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  • Bai, Lan
  • Wei, Yu
  • Zhang, Jiahao
  • Wang, Yizhi
  • Lucey, Brian M.

Abstract

Socially responsible investment (SRI) is becoming increasingly popular in China, with the announcement of carbon dioxide peaking by 2030 and carbon neutrality by 2060 (30–60 targets). As a conventional underlying asset of SRI, renewable energy stocks are attractive, but with higher price volatility than many other traditional industrial stocks. This paper aims to investigate the interaction and diversification effects of China's Carbon Neutral Bond (CNB), a new SRI underlying asset just launched in 2021, on renewable energy stocks using a novel minimum connectedness portfolio approach recently proposed by Broadstock et al. (2020). The empirical results show that, first, China's CNB is weakly related to renewable energy stocks, whether in the time or frequency domain, and is the main recipient of the net linkage effect. Second, different renewable energy stocks benefit differently from the diversification effect of CNB. However, in extreme market conditions, the diversification effect of the CNB is reduced. Third, the newly developed minimum connectedness portfolio approach can outperform traditional minimum variance and correlation methods by achieving higher cumulative portfolio returns. Finally, the Sharpe ratios of renewable energy stock portfolios with CNB are significantly higher than those without it across different allocation methods. These findings have important implications for policy makers and SRI investors.

Suggested Citation

  • Bai, Lan & Wei, Yu & Zhang, Jiahao & Wang, Yizhi & Lucey, Brian M., 2023. "Diversification effects of China's carbon neutral bond on renewable energy stock markets: A minimum connectedness portfolio approach," Energy Economics, Elsevier, vol. 123(C).
    • Handle: RePEc:eee:eneeco:v:123:y:2023:i:c:s0140988323002256
    DOI: 10.1016/j.eneco.2023.106727
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    3. Gu, Leilei & Peng, Yuchao & Vigne, Samuel A. & Wang, Yizhi, 2023. "Hidden costs of non-green performance? The impact of air pollution awareness on loan rates for Chinese firms," Journal of Economic Behavior & Organization, Elsevier, vol. 213(C), pages 233-250.

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    More about this item

    Keywords

    Carbon neutral bond; Renewable energy stock; Socially responsible investment; Minimum connectedness portfolio;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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