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Can bonds hedge stock market risks? Green bonds vs conventional bonds

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  • Dong, Xiyong
  • Xiong, Youlin
  • Nie, Siyue
  • Yoon, Seong-Min

Abstract

Growing concerns about climate change have generated several ecofriendly investments, including green bonds. This study investigates the impacts of geopolitical, economic and climate policy risks (GPR, EPU and CPU, respectively) on the long-term conventional/energy stock and conventional/green bond correlations using the DCC-MIDAS-X model. We determine that GPR, EPU and CPU impact the correlations between these stock and bond markets differently. Both conventional and green bonds have a safe-haven function when GPR levels are high, while green bonds outperform conventional bonds as a safe haven when EPU and CPU levels are high. Moreover, incorporating green bond assets into diversified portfolios provides the best hedging effectiveness, particularly for assets with a high carbon footprint.

Suggested Citation

  • Dong, Xiyong & Xiong, Youlin & Nie, Siyue & Yoon, Seong-Min, 2023. "Can bonds hedge stock market risks? Green bonds vs conventional bonds," Finance Research Letters, Elsevier, vol. 52(C).
    • Handle: RePEc:eee:finlet:v:52:y:2023:i:c:s154461232200544x
    DOI: 10.1016/j.frl.2022.103367
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    2. Guo, Yaoqi & Deng, Yiwen & Zhang, Hongwei, 2023. "How do composite and categorical economic policy uncertainties affect the long-term correlation between China's stock and conventional/green bond markets?," Finance Research Letters, Elsevier, vol. 57(C).
    3. Sheenan, Lisa, 2023. "Green Bonds, Conventional Bonds and Geopolitical Risk," QBS Working Paper Series 2023/05, Queen's University Belfast, Queen's Business School.
    4. Man, Yuanyuan & Zhang, Sunpei & Liu, Jianing, 2023. "Dynamic connectedness, asymmetric risk spillovers, and hedging performance of China's green bonds," Finance Research Letters, Elsevier, vol. 56(C).
    5. Dong, Xiyong & Yoon, Seong-Min, 2023. "Effect of weather and environmental attentions on financial system risks: Evidence from Chinese high- and low-carbon assets," Energy Economics, Elsevier, vol. 121(C).

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    More about this item

    Keywords

    Green bonds; Geopolitical risk; Policy uncertainty; DCC-MIDAS-X;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • Q34 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Natural Resources and Domestic and International Conflicts
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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