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Do green bonds de-risk investment in low-carbon stocks?

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  • Reboredo, Juan C.
  • Ugolini, Andrea
  • Ojea-Ferreiro, Javier

Abstract

De-risking green investments is crucial to unlocking climate finance and to spurring investors’ interest in allocating resources to activities consistent with a resilient low-carbon economy. We explore the extent to which green bonds could de-risk investments in low-carbon assets by considering different market circumstances. We characterize joint dependence between green bonds and low-carbon assets and consider a de-risking metric based on expected shortfall. Our analysis for the Chinese, European and US markets for 2016 to 2020 indicates that green-bond and low-carbon stock returns move in opposite directions or independently, and a fall in green-bond returns below the 5% quantile increases the expected value of low-carbon stocks by 8.6% and 15.1% in the Chinese and European markets, respectively, but has a negligible effect on the US market. We also document that green bonds have sizeable diversification benefits when they are included in low-carbon investment portfolios.

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  • Reboredo, Juan C. & Ugolini, Andrea & Ojea-Ferreiro, Javier, 2022. "Do green bonds de-risk investment in low-carbon stocks?," Economic Modelling, Elsevier, vol. 108(C).
    • Handle: RePEc:eee:ecmode:v:108:y:2022:i:c:s0264999322000116
    DOI: 10.1016/j.econmod.2022.105765
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    2. Huang, Zishan & Zhu, Huiming & Hau, Liya & Deng, Xi, 2023. "Time-frequency co-movement and network connectedness between green bond and financial asset markets: Evidence from multiscale TVP-VAR analysis," The North American Journal of Economics and Finance, Elsevier, vol. 67(C).
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    4. Su, Xianfang & Guo, Dawei & Dai, Liang, 2023. "Do green bond and green stock markets boom and bust together? Evidence from China," International Review of Financial Analysis, Elsevier, vol. 89(C).
    5. Dong, Xiao & Yu, Mingzhe, 2024. "Green bond issuance and green innovation: Evidence from China's energy industry," International Review of Financial Analysis, Elsevier, vol. 94(C).
    6. Doğan, Buhari & Trabelsi, Nader & Tiwari, Aviral Kumar & Ghosh, Sudeshna, 2023. "Dynamic dependence and causality between crude oil, green bonds, commodities, geopolitical risks, and policy uncertainty," The Quarterly Review of Economics and Finance, Elsevier, vol. 89(C), pages 36-62.
    7. Lucey, Brian & Ren, Boru, 2023. "Time-varying tail risk connectedness among sustainability-related products and fossil energy investments," Energy Economics, Elsevier, vol. 126(C).
    8. Reboredo, Juan C. & Ugolini, Andrea & Ojea-Ferreiro, Javier, 2024. "Tail risks of energy transition metal prices for commodity prices," Resources Policy, Elsevier, vol. 93(C).
    9. 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).
    10. Zou, Jin & Yan, Jingzhou & Deng, Guoying, 2023. "ESG rating confusion and bond spreads," Economic Modelling, Elsevier, vol. 129(C).
    11. Li, Houjian & Li, Qingman & Huang, Xinya & Guo, Lili, 2023. "Do green bonds and economic policy uncertainty matter for carbon price? New insights from a TVP-VAR framework," International Review of Financial Analysis, Elsevier, vol. 86(C).
    12. Gao, Yang & Zhou, Yueyi & Zhao, Longfeng, 2024. "Quantile interdependence and network connectedness between China's green financial and energy markets," Economic Analysis and Policy, Elsevier, vol. 81(C), pages 1148-1177.
    13. Wang, Hu & Shen, Hong & Li, Shouwei, 2023. "Does green direct financing work in reducing carbon risk?," Economic Modelling, Elsevier, vol. 128(C).
    14. 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).
    15. Wang, Xiong & Li, Jingyao & Ren, Xiaohang, 2022. "Asymmetric causality of economic policy uncertainty and oil volatility index on time-varying nexus of the clean energy, carbon and green bond," International Review of Financial Analysis, Elsevier, vol. 83(C).
    16. Chopra, Monika & Mehta, Chhavi, 2023. "Going green: Do green bonds act as a hedge and safe haven for stock sector risk?," Finance Research Letters, Elsevier, vol. 51(C).
    17. Zhu, Qing & Lu, Kai & Liu, Shan & Ruan, Yinglin & Wang, Lin & Yang, Sung-Byung, 2022. "Can low-carbon value bring high returns? Novel quantitative trading from portfolio-of-investment targets in a new-energy market," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 755-769.

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    More about this item

    Keywords

    Green bonds; Low-carbon stocks; de-risking; Copulas; Expected shortfall;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q01 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Sustainable Development
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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