Green Shocks: The Spillover Effects of Green Equity Indices on Global Market Dynamics

Tiago Trancoso and Sofia Gomes ()
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Tiago Trancoso: ProMetheus—Instituto Politécnico de Viana do Castelo, Rua Escola Industrial e Comercial Nun’Álvares, Viana do Castelo 4900-347, Portugal
Sofia Gomes: Research on Economics, Management and Information Technologies, REMIT, Portucalense University, Rua Dr. António Bernardino de Almeida 541, 4200-072 Porto, Portugal

Economies, 2024, vol. 12, issue 4, 1-16

Abstract: This study investigates the impact of green equity indices on global market dynamics using a time-varying parameter vector autoregression (TVP-VAR) model. We uncover a significant shift in the role of the global market, transitioning from a shock transmitter to a shock receiver, as the influence of green finance grows. By directly comparing green equity indices with their corresponding global parent indices, we adopt a global perspective that transcends the limitations of studies focusing on specific regions, such as the USA, China, or Europe. This novel approach minimizes the potential biases in the transmission channels within regional markets, enabling a more comprehensive understanding of the relationship between green finance and global market dynamics. Moreover, by focusing on equity indices we ensure a consistent comparison of financial instruments, avoiding the complexities that arise when comparing different asset classes such as green bonds and conventional equities. For global investors, our results highlight the importance of dynamic and flexible hedging strategies that adapt to the distinct characteristics of green assets and their growing influence on the global market. Risk managers should incorporate these time-varying spillover effects into their models to better assess and mitigate potential risks. Policymakers should consider the growing influence of green finance on the broader market when formulating regulations and incentives to support sustainable investing, as our findings underscore the increasing importance of this sector in shaping market dynamics.

Keywords: spillovers; green equity indices; green finance; economic interconnectedness; TVP-VAR (search for similar items in EconPapers)
JEL-codes: E F I J O Q (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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