A multi-dimensional connectedness and spillover between green bond and Islamic banking equity: Evidence from country level analysis

Syed Billah, Sinda Hadhri, Mohammad Enamul Hoque and Faruk Balli

Pacific-Basin Finance Journal, 2024, vol. 83, issue C

Abstract: The paper delves into the multidimensional connections and spillover between green bonds and Islamic banking stocks from eleven countries. Throughout this study, we further explored optimal hedging mechanisms, as well as optimal portfolio weighting mechanisms, with Islamic banking equities and green bonds. Our empirical results show that there is a moderate level of interrelation between green bonds and Islamic banking indices, with low connectedness throughout the long-term and medium-term. The time-varying spillover effects become higher, albeit low, in the early periods of both SOR and COVID-19 at short-, medium-, and long-term scales, which suggests some diversification and hedging benefits from holding portfolios of the two assets. Country-based Islamic bank markets are not largely affected by disturbances that emerged in some other markets in the short-, medium-, or long-term timescales. The Chinese green bond market has a tendency to be the greatest net risk transceiver for both the green bond and Islamic bank markets over the medium and long term, whilst the global green bond index has been the leading net risk transmitter during the short term. Only the UAE and Saudi Islamic Banking indices act as net risk transmitters in the short and medium term. The empirical findings further suggest that global risk variables are dependable drivers of the extent of spillover between Islamic banking indices and green bonds. Our research shows that owning Islamic bank stocks during COVID-19 and SOR minimizes the significant risk linked to holding green bonds, which has profound implications for risk management and portfolio creation. Thus, our study offers important implications for economic agents.

Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:83:y:2024:i:c:s0927538x2400009x

DOI: 10.1016/j.pacfin.2024.102258

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