Can bonds hedge stock market risks? Green bonds vs conventional bonds

Xiyong Dong, Youlin Xiong, Siyue Nie and Seong-Min Yoon

Finance Research Letters, 2023, vol. 52, issue C

Abstract: Growing concerns about climate change have generated several ecofriendly investments, including green bonds. This study investigates the impacts of geopolitical, economic and climate policy risks (GPR, EPU and CPU, respectively) on the long-term conventional/energy stock and conventional/green bond correlations using the DCC-MIDAS-X model. We determine that GPR, EPU and CPU impact the correlations between these stock and bond markets differently. Both conventional and green bonds have a safe-haven function when GPR levels are high, while green bonds outperform conventional bonds as a safe haven when EPU and CPU levels are high. Moreover, incorporating green bond assets into diversified portfolios provides the best hedging effectiveness, particularly for assets with a high carbon footprint.

Keywords: Green bonds; Geopolitical risk; Policy uncertainty; DCC-MIDAS-X (search for similar items in EconPapers)
JEL-codes: C58 G11 Q34 Q54 Q58 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:52:y:2023:i:c:s154461232200544x

DOI: 10.1016/j.frl.2022.103367

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