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The connectedness of financial risk and green financial instruments: a dynamic and frequency analysis

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  • Ngoepe, Letlhogonolo Kearabilwe
  • Bonga-Bonga, Lumengo

Abstract

Various ‘green’ investment channels cater specifically to environmentally conscious investments. In this paper, we investigate the optimal green investment strategy by comparing the risk of three green financial instruments– green bonds, green equity, and a balanced 50/50 bond equity fund. Using the dynamic and frequency connectedness approaches by Diebold and Yilmaz (2012) and Baruník and Křehlík (2018), we analyze how financial risk affects green investment over various time horizons. Our findings show that green equity possesses the highest risk spillovers. Furthermore, green bonds and the ESG equity index provide risk diversification benefits for green investors. The balanced index displays a low risk-return nexus, further indicating that green investors are better off by investing in a diversified portfolio. Lastly, under unfavourable market conditions, the green investment market instruments provide little to no diversification against each other.

Suggested Citation

  • Ngoepe, Letlhogonolo Kearabilwe & Bonga-Bonga, Lumengo, 2024. "The connectedness of financial risk and green financial instruments: a dynamic and frequency analysis," MPRA Paper 121091, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:121091
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    References listed on IDEAS

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    More about this item

    Keywords

    Green equity; ESG equity index; balanced index; frequency connetedness;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • F3 - International Economics - - International Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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