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Interactions between sustainable bonds, renewable energy and other financial markets: A macroprudential perspective

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  • Sheenan, Lisa
  • Schweers, Koen
  • Klein, Tony

Abstract

We analyse linkages between sustainable bond markets and a number of key financial markets in Europe, namely corporate bond, sovereign bond, renewable energy, equity and volatility markets. We apply a novel empirical approach using zero-volatility spreads (z-spreads) as a measure of relative bond performance to adjust for the sensitivity of bond prices to changes in interest rates. We model these linkages using a Markov-switching vector autoregressive model and static and dynamic copulas that enable us to test for contagion with conditional value-at-risk measures. We find evidence of bi-directional contagion between the sustainability-linked bond and green bond markets along with contagion between other fixed-income markets and the sustainable bond market. Our results indicate possible diversification benefits that green bonds or sustainability-linked bonds may provide to investors active in the key markets analysed.

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  • Sheenan, Lisa & Schweers, Koen & Klein, Tony, 2024. "Interactions between sustainable bonds, renewable energy and other financial markets: A macroprudential perspective," Energy Economics, Elsevier, vol. 138(C).
    • Handle: RePEc:eee:eneeco:v:138:y:2024:i:c:s0140988324005474
    DOI: 10.1016/j.eneco.2024.107839
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    Cited by:

    1. Bonga-Bonga, Lumengo & Kirsten, Frederich, 2024. "Renewable energy generation and financial market dynamics in Europe: a disaggregated approach," MPRA Paper 122461, University Library of Munich, Germany.

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    More about this item

    Keywords

    Sustainable bonds; Connectedness; Contagion risk; Markov-switching VAR; Green bonds; Sustainability-linked bonds;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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