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Hedging climate risks with green assets

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  • Cepni, Oguzhan
  • Demirer, Riza
  • Rognone, Lavinia

Abstract

Utilizing two novel measures of transition and physical climate risks obtained from textual analysis, we examine the hedging benefits of various green assets and popular precious metals against climate uncertainty. We find that green bonds stand out from the rest of the assets in our sample, including gold, exhibiting a consistent positive correlation with both types of climate risks. The findings suggest that green bonds can offer reliable safe haven benefits against climate uncertainty, providing new insight into the role of these assets not only as an investment that offers benefits associated with socially responsible investing, but also as a tool to manage climate risk exposures in investment portfolios.

Suggested Citation

  • Cepni, Oguzhan & Demirer, Riza & Rognone, Lavinia, 2022. "Hedging climate risks with green assets," Economics Letters, Elsevier, vol. 212(C).
    • Handle: RePEc:eee:ecolet:v:212:y:2022:i:c:s0165176522000222
    DOI: 10.1016/j.econlet.2022.110312
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    References listed on IDEAS

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    1. Robert F Engle & Stefano Giglio & Bryan Kelly & Heebum Lee & Johannes Stroebel, 2020. "Hedging Climate Change News," Review of Financial Studies, Society for Financial Studies, vol. 33(3), pages 1184-1216.
    2. Bolton, Patrick & Kacperczyk, Marcin, 2021. "Do investors care about carbon risk?," Journal of Financial Economics, Elsevier, vol. 142(2), pages 517-549.
    3. Lorenzo Cappiello & Robert F. Engle & Kevin Sheppard, 2006. "Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns," Journal of Financial Econometrics, Oxford University Press, vol. 4(4), pages 537-572.
    4. Yousaf, Imran & Suleman, Muhammad Tahir & Demirer, Riza, 2022. "Green investments: A luxury good or a financial necessity?," Energy Economics, Elsevier, vol. 105(C).
    5. Engle, Robert & Colacito, Riccardo, 2006. "Testing and Valuing Dynamic Correlations for Asset Allocation," Journal of Business & Economic Statistics, American Statistical Association, vol. 24, pages 238-253, April.
    6. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-350, July.
    7. Kroner, Kenneth F & Ng, Victor K, 1998. "Modeling Asymmetric Comovements of Asset Returns," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 817-844.
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    Citations

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    Cited by:

    1. Gupta, Rangan & Nel, Jacobus & Salisu, Afees A. & Ji, Qiang, 2023. "Predictability of economic slowdowns in advanced countries over eight centuries: The role of climate risks," Finance Research Letters, Elsevier, vol. 54(C).
    2. Karim, Sitara & Naeem, Muhammad Abubakr & Shafiullah, Muhammad & Lucey, Brian M. & Ashraf, Sania, 2023. "Asymmetric relationship between climate policy uncertainty and energy metals: Evidence from cross-quantilogram," Finance Research Letters, Elsevier, vol. 54(C).
    3. Karmakar, Sayar & Gupta, Rangan & Cepni, Oguzhan & Rognone, Lavinia, 2023. "Climate risks and predictability of the trading volume of gold: Evidence from an INGARCH model," Resources Policy, Elsevier, vol. 82(C).
    4. Dunbar, Kwamie & Treku, Daniel & Sarnie, Robert & Hoover, Jack, 2023. "What does ESG risk premia tell us about mutual fund sustainability levels: A difference-in-differences analysis," Finance Research Letters, Elsevier, vol. 57(C).
    5. Ren, Xiaohang & Li, Jingyao & He, Feng & Lucey, Brian, 2023. "Impact of climate policy uncertainty on traditional energy and green markets: Evidence from time-varying granger tests," Renewable and Sustainable Energy Reviews, Elsevier, vol. 173(C).
    6. Volker Brühl, 2023. "The Green Asset Ratio (GAR): a new key performance indicator for credit institutions," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 13(1), pages 57-83, March.
    7. Ozturk, Serda Selin & Demirer, Riza & Gupta, Rangan, 2022. "Climate uncertainty and carbon emissions prices: The relative roles of transition and physical climate risks," Economics Letters, Elsevier, vol. 217(C).
    8. Sheenan, Lisa, 2023. "Green Bonds, Conventional Bonds and Geopolitical Risk," QBS Working Paper Series 2023/05, Queen's University Belfast, Queen's Business School.
    9. Khalfaoui, Rabeh & Mefteh-Wali, Salma & Dogan, Buhari & Ghosh, Sudeshna, 2023. "Extreme spillover effect of COVID-19 pandemic-related news and cryptocurrencies on green bond markets: A quantile connectedness analysis," International Review of Financial Analysis, Elsevier, vol. 86(C).
    10. Cepni, Oguzhan & Demirer, Riza & Pham, Linh & Rognone, Lavinia, 2023. "Climate uncertainty and information transmissions across the conventional and ESG assets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 83(C).
    11. 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).
    12. Carè, R. & Weber, O., 2023. "How much finance is in climate finance? A bibliometric review, critiques, and future research directions," Research in International Business and Finance, Elsevier, vol. 64(C).
    13. Rizvi, Syed Kumail Abbas & Naqvi, Bushra & Mirza, Nawazish & Umar, Muhammad, 2022. "Safe haven properties of green, Islamic, and crypto assets and investor's proclivity towards treasury and gold," Energy Economics, Elsevier, vol. 115(C).
    14. Jiawen Luo & Oguzhan Cepni & Riza Demirer & Rangan Gupta, 2022. "Forecasting Multivariate Volatilities with Exogenous Predictors: An Application to Industry Diversification Strategies," Working Papers 202258, University of Pretoria, Department of Economics.

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    More about this item

    Keywords

    Climate risk; Asymmetric DCC-GARCH; Hedging; Green bonds; Precious metals;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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