Green bonds as hedging assets before and after COVID: a comparative study between the US and China

Guo, Dong and Zhou, Peng ORCID: https://orcid.org/0000-0002-4310-9474 2021. Green bonds as hedging assets before and after COVID: a comparative study between the US and China. Energy Economics 104 , 105696. 10.1016/j.eneco.2021.105696

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Abstract

The COVID pandemic reveals the fragility of the global financial market during rare disasters. Conventional safe-haven assets like gold can be used to hedge against ordinary risks, but tail dependence can substantially reduce the hedging effectiveness. In contrast, green bonds focus on long-term, sustainable investments, so they become an important hedging tool against climate risks, financial risks, as well as rare disasters like COVID. The copula approach based on the TGARCH model is applied to estimate the joint distributions between green bonds and selected financial assets in both US and China. The quantile-based approach is also performed to offer a robustness check on tail dependence. The results show that all assets in the two countries have thick tails and tail dependence with time-varying features. The hedging effectiveness does decline during the COVID pandemic, but it is the hedging effectiveness against tail risks rather than against normal risks. It is argued that green bonds play a significant role in hedging against rare disasters especially in forex markets. It is also found that green bonds in the US and China converge in many aspects, suggesting a smaller cross-country difference than cross-asset difference.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Publisher:	Elsevier
ISSN:	0140-9883
Date of First Compliant Deposit:	23 November 2021
Date of Acceptance:	4 November 2021
Last Modified:	07 Nov 2023 19:28
URI:	https://orca.cardiff.ac.uk/id/eprint/145529

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