Asymmetric connectedness between cryptocurrency environment attention index and green assets

Abstract

Given the recent evolution of green bonds as hedging tool on the face of climate change and green energy transitions, as well as cryptocurrencies’ popularity as portfolio diversifier, prior literature could focus on the potential impacts of environmental concerns in conjunction with cryptocurrencies on the performance of green financial assets. Against this backdrop, we analyse the impact of cryptocurrency environment attention index (ICEA) on clean energy stocks and green bonds using a range of econometric methods. Specifically, we use OLS, and quantile-based regression, quantile connectedness approach, and dynamic conditional correlations (DCC)-GJR-GARCH model to analyse the data. Quantile regression results suggest that ICEA exerts positive effects on S&P500 stocks in bearish market conditions and on water stocks in normal to bullish market conditions. Interestingly, clean energy stocks and green bonds have insignificant relationship with the ICEA based on OLS and quantile regression results. While, quantile connectedness results show that connectedness among the assets is low (high) at lower (higher) quantiles. Additionally, ICEA transmits (receives) weak spillovers to (from) other assets at lower quantiles, thus there is potential for diversification with clean energy stocks and green bonds in the portfolio against ICEA in bearish market conditions. Our DCC – GARCH based analysis shows that gold has positive relationship with the ICEA. DCCs also show that clean energy stocks have consistently positive relationship with ICEA, specifically during the period of high spikes of ICEA in 2017–2021, but green bonds failed to maintain consistent positive correlations with ICEA during such period. Finally, covid period reveals higher connectedness and changes in direction of contagion among assets, and lack of significant relationship between ICEA and asset returns. Our findings have important implications for the investors in the construction of optimal portfolio with carbon free assets in different markets states.