IDEAS home Printed from https://ideas.repec.org/a/eee/jrpoli/v74y2021ics0301420721002762.html
   My bibliography  Save this article

Climate bond, stock, gold, and oil markets: Dynamic correlations and hedging analyses during the COVID-19 outbreak

Author

Listed:
  • Dutta, Anupam
  • Bouri, Elie
  • Noor, Md Hasib

Abstract

Adverse ecological effects have recently generated several eco-friendly investment opportunities including green and climate bonds. Although climate bonds have emerged as an appealing investment, little is known about their dynamic correlations and market linkages with US equities, crude oil, and gold markets, especially during stress times such as the COVID-19 outbreak, which are essential for asset allocation and hedging effectiveness. In this paper, we report time-varying correlations between climate bonds and each of the markets considered, which intensify during the COVID-19 pandemic. On average, climate bonds are negatively associated with US equities and have a near zero correlation with crude oil, whereas they are positively associated with gold. There is a bidirectional volatility linkage between climate bonds and the three indexes under study, whereas return linkages are marginal. The hedge ratio is positive for bond-gold, whereas it switches between positive and negative states for bond-stock and bond-oil, especially it switches more extremely during the COVID-19 outbreak. Although climate bonds provide the highest risk reduction in a portfolio containing US equities or gold as a part of a hedging strategy, their hedging effectiveness is considerably reduced during the pandemic. The findings have implications for markets participants aiming to green their portfolios and make them robust during stress times, enabling a smooth and speedy transition to a low-carbon economy.

Suggested Citation

  • Dutta, Anupam & Bouri, Elie & Noor, Md Hasib, 2021. "Climate bond, stock, gold, and oil markets: Dynamic correlations and hedging analyses during the COVID-19 outbreak," Resources Policy, Elsevier, vol. 74(C).
    • Handle: RePEc:eee:jrpoli:v:74:y:2021:i:c:s0301420721002762
    DOI: 10.1016/j.resourpol.2021.102265
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0301420721002762
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.resourpol.2021.102265?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hammoudeh, Shawkat & Ajmi, Ahdi Noomen & Mokni, Khaled, 2020. "Relationship between green bonds and financial and environmental variables: A novel time-varying causality," Energy Economics, Elsevier, vol. 92(C).
    2. 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.
    3. Dirk G. Baur & Brian M. Lucey, 2010. "Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds and Gold," The Financial Review, Eastern Finance Association, vol. 45(2), pages 217-229, May.
    4. Reboredo, Juan C., 2018. "Green bond and financial markets: Co-movement, diversification and price spillover effects," Energy Economics, Elsevier, vol. 74(C), pages 38-50.
    5. Dungey, Mardi & McKenzie, Michael & Tambakis, Demosthenes N., 2009. "Flight-to-quality and asymmetric volatility responses in US Treasuries," Global Finance Journal, Elsevier, vol. 19(3), pages 252-267.
    6. Reboredo, Juan C. & Ugolini, Andrea & Aiube, Fernando Antonio Lucena, 2020. "Network connectedness of green bonds and asset classes," Energy Economics, Elsevier, vol. 86(C).
    7. Junttila, Juha & Pesonen, Juho & Raatikainen, Juhani, 2018. "Commodity market based hedging against stock market risk in times of financial crisis: The case of crude oil and gold," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 56(C), pages 255-280.
    8. Gian Piero Aielli, 2013. "Dynamic Conditional Correlation: On Properties and Estimation," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 31(3), pages 282-299, July.
    9. Basher, Syed Abul & Sadorsky, Perry, 2016. "Hedging emerging market stock prices with oil, gold, VIX, and bonds: A comparison between DCC, ADCC and GO-GARCH," Energy Economics, Elsevier, vol. 54(C), pages 235-247.
    10. Kanamura, Takashi, 2020. "Are green bonds environmentally friendly and good performing assets?," Energy Economics, Elsevier, vol. 88(C).
    11. Torsten Ehlers & Frank Packer, 2017. "Green bond finance and certification," BIS Quarterly Review, Bank for International Settlements, September.
    12. Dutta, Anupam & Bouri, Elie & Roubaud, David, 2019. "Nonlinear relationships amongst the implied volatilities of crude oil and precious metals," Resources Policy, Elsevier, vol. 61(C), pages 473-478.
    13. Singhal, Shelly & Ghosh, Sajal, 2016. "Returns and volatility linkages between international crude oil price, metal and other stock indices in India: Evidence from VAR-DCC-GARCH models," Resources Policy, Elsevier, vol. 50(C), pages 276-288.
    14. Lin, Boqiang & Wesseh, Presley K. & Appiah, Michael Owusu, 2014. "Oil price fluctuation, volatility spillover and the Ghanaian equity market: Implication for portfolio management and hedging effectiveness," Energy Economics, Elsevier, vol. 42(C), pages 172-182.
    15. Reboredo, Juan C. & Ugolini, Andrea, 2020. "Price connectedness between green bond and financial markets," Economic Modelling, Elsevier, vol. 88(C), pages 25-38.
    16. 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.
    17. Gormus, Alper & Nazlioglu, Saban & Soytas, Ugur, 2018. "High-yield bond and energy markets," Energy Economics, Elsevier, vol. 69(C), pages 101-110.
    18. Sun, Yongping & Yang, Ying & Huang, Nan & Zou, Xin, 2020. "The impacts of climate change risks on financial performance of mining industry: Evidence from listed companies in China," Resources Policy, Elsevier, vol. 69(C).
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Pham, Linh & Do, Hung Xuan, 2022. "Green bonds and implied volatilities: Dynamic causality, spillovers, and implications for portfolio management," Energy Economics, Elsevier, vol. 112(C).
    2. Akhtaruzzaman, Md & Banerjee, Ameet Kumar & Ghardallou, Wafa & Umar, Zaghum, 2022. "Is greenness an optimal hedge for sectoral stock indices?," Economic Modelling, Elsevier, vol. 117(C).
    3. Tiwari, Aviral Kumar & Aikins Abakah, Emmanuel Joel & Adekoya, Oluwasegun B. & Hammoudeh, Shawkat, 2023. "What do we know about the price spillover between green bonds and Islamic stocks and stock market indices?," Global Finance Journal, Elsevier, vol. 55(C).
    4. Abakah, Emmanuel Joel Aikins & Tiwari, Aviral Kumar & Adekoya, Oluwasegun B. & Oteng-Abayie, Eric Fosu, 2023. "An analysis of the time-varying causality and dynamic correlation between green bonds and US gas prices," Technological Forecasting and Social Change, Elsevier, vol. 186(PA).
    5. Wajdi Hamma & Ahmed Ghorbel & Anis Jarboui, 2021. "Hedging Islamic and conventional stock markets with other financial assets: comparison between competing DCC models on hedging effectiveness," Journal of Asset Management, Palgrave Macmillan, vol. 22(3), pages 179-199, May.
    6. Tarchella, Salma & Khalfaoui, Rabeh & Hammoudeh, Shawkat, 2024. "The safe haven, hedging, and diversification properties of oil, gold, and cryptocurrency for the G7 equity markets: Evidence from the pre- and post-COVID-19 periods," Research in International Business and Finance, Elsevier, vol. 67(PB).
    7. Tsuji, Chikashi, 2020. "Correlation and spillover effects between the US and international banking sectors: New evidence and implications for risk management," International Review of Financial Analysis, Elsevier, vol. 70(C).
    8. Akhtaruzzaman, Md & Boubaker, Sabri & Lucey, Brian M. & Sensoy, Ahmet, 2021. "Is gold a hedge or a safe-haven asset in the COVID–19 crisis?," Economic Modelling, Elsevier, vol. 102(C).
    9. Román Ferrer & Rafael Benítez & Vicente J. Bolós, 2021. "Interdependence between Green Financial Instruments and Major Conventional Assets: A Wavelet-Based Network Analysis," Mathematics, MDPI, vol. 9(8), pages 1-20, April.
    10. Liu, Min, 2022. "The driving forces of green bond market volatility and the response of the market to the COVID-19 pandemic," Economic Analysis and Policy, Elsevier, vol. 75(C), pages 288-309.
    11. Umar, Zaghum & Abrar, Afsheen & Hadhri, Sinda & Sokolova, Tatiana, 2023. "The connectedness of oil shocks, green bonds, sukuks and conventional bonds," Energy Economics, Elsevier, vol. 119(C).
    12. 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).
    13. Naeem, Muhammad Abubakr & Nguyen, Thi Thu Ha & Nepal, Rabindra & Ngo, Quang-Thanh & Taghizadeh–Hesary, Farhad, 2021. "Asymmetric relationship between green bonds and commodities: Evidence from extreme quantile approach," Finance Research Letters, Elsevier, vol. 43(C).
    14. Jin, Jiayu & Han, Liyan & Wu, Lei & Zeng, Hongchao, 2020. "The hedging effectiveness of global sectors in emerging and developed stock markets," International Review of Economics & Finance, Elsevier, vol. 66(C), pages 92-117.
    15. Flavin, Thomas & Sheenan, Lisa, 2023. "Can Green Bonds be a Safe Haven for Equity Investors?," QBS Working Paper Series 2023/06, Queen's University Belfast, Queen's Business School.
    16. Lucey, Brian & Ren, Boru, 2023. "Time-varying tail risk connectedness among sustainability-related products and fossil energy investments," Energy Economics, Elsevier, vol. 126(C).
    17. Ali, Sajid & Raza, Naveed & Vinh Vo, Xuan & Le, Van, 2022. "Modelling the joint dynamics of financial assets using MGARCH family models: Insights into hedging and diversification strategies," Resources Policy, Elsevier, vol. 78(C).
    18. Arif, Muhammad & Hasan, Mudassar & Alawi, Suha M. & Naeem, Muhammad Abubakr, 2021. "COVID-19 and time-frequency connectedness between green and conventional financial markets," Global Finance Journal, Elsevier, vol. 49(C).
    19. Arif, Muhammad & Naeem, Muhammad Abubakr & Farid, Saqib & Nepal, Rabindra & Jamasb, Tooraj, 2022. "Diversifier or more? Hedge and safe haven properties of green bonds during COVID-19," Energy Policy, Elsevier, vol. 168(C).
    20. Kuang, Wei, 2023. "The equity-oil hedge: A comparison between volatility and alternative risk frameworks," Energy, Elsevier, vol. 271(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jrpoli:v:74:y:2021:i:c:s0301420721002762. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30467 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.