Tail risk dependence, co-movement and predictability between green bond and green stocks

ABSTRACT

This paper examines the coherence of extreme returns between green bonds and a unique set of green stocks. We use the novel quantile cross-spectral coherence methodology of quantile spectral coherency model, cross-quantilogram correlation approach, windowed time-lagged cross-correlation, and windowed scalogram difference models as estimation techniques. The study period spans from 28 November 2008 to 23 September 2020. Our measure of green stocks comprises the constituents of the MSCI Global Environment Price Index: Alternative Energy, Green Building, Pollution Prevention or Clean Technology while our green bond market is proxied by S&P Green Bond Index. We find the dependency between Green Bonds and green stocks to be weak, and this is high during market downturn periods in the short- to medium-term dynamics. This suggests that Green Bonds do act as a hedge, diversifier, or safe-haven instrument for environment portfolio in the short-term, medium-term and long-term dynamics during bearish market conditions. We conclude that green bonds and green stocks are two distinct asset classes with a distinct risk-return profile despite their common climate-friendly nature.

KEYWORDS:

• Green bond
• environmental securities
• cross-Quantilogram correlation
• wavelets scalogram

JEL CLASSIFICATION:

• C22
• G00
• G12

Acknowledgements

We acknowledge the valuable and extensive comments of the anonymous reviewer. Additionally, we appreciate the support received from The University of Adelaide since this project commenced while Emmanuel was there. Any errors and shortcomings remain the authors’ responsibility.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Supplementary material

Supplemental data for this article can be accessed online at https://doi.org/10.1080/00036846.2022.2085869.

Notes

¹ https://www.spglobal.com/ratings/en/research/articles/210127-environmental-social-and-governance-sustainable-debt-markets-surge-as-social-and-transition-financing-take-11814121.

² https://www.spglobal.com/en/research-insights/featured/green-liquidity-moves-mainstream.

³ https://www.spglobal.com/en/research-insights/featured/green-liquidity-moves-mainstream.