Inflation expectations and climate concerns in the U.S. green versus traditional stock–bond nexus: A de-risking analysis

This study examines how inflation expectations and climate change concerns influence the U.S. green stock-bond nexus compared to the traditional nexus, with a focus on the risk-mitigation role of green bonds in portfolios that combine clean energy stocks and green bonds. We first employ C-vine copulas to model the dependence structure between clean energy stocks and green bonds, explicitly conditioning on inflation expectations and climate change concerns to isolate their individual effects. We then quantify the de-risking capacity of green bonds under diverse macroeconomic and environmental conditions using a measure based on expected shortfall differences. To provide comparative insight, we assess the risk-reduction properties of U.S. conventional bonds in traditional stock-bond portfolios, highlighting differences between green and conventional market segments. Our empirical findings reveal that green bonds provided significant de-risking benefits for clean energy stocks until late 2021, especially during the early stages of the COVID-19 pandemic. The de-risking benefits declined sharply with the onset of the Russia-Ukraine conflict, due to rising inflationary pressures and increased geopolitical tensions. These findings underscore the conditional and context-dependent nature of green bonds’ defensive attributes, which are effective under normal market conditions but falter during severe macroeconomic and geopolitical turmoil. Climate change concerns do not materially influence the de-risking properties of conventional bonds, suggesting that climate-related risks have limited impact on the co-movement between U.S. conventional equity and bond markets.