Abstract
COVID-19 has morphed from a health crisis to an economic crisis that affected the global economy through several channels. This paper aims to study the impact of COVID-19 on the time-frequency connectedness between Green Bonds and other financial assets. Our sample includes the global stock market, bond market, oil, USD index, and two popular hedging alternatives, namely Gold and Bitcoin, from May 2013 to August 2020. First, we apply the methodologies of Diebold and Yilmaz (International Journal of Forecasting, 2012, 28(1), 57–66) and Baruník and Křehlík (Journal of Financial Econometrics, 2018, 16(2), 271–296). Then, we estimate hedge ratios and hedge effectiveness of green bonds for other financial assets. Green bonds are found to have a great weight in the overall network, particularly strongly connected with the USD index and bond index. While the bi-directional relationship with USD persists during COVID, the connectedness with conventional bonds is also strengthened. Notably, we find a weak relationship between Green bonds and Bitcoin, both in the short and long run. As portfolio implications, Gold and USD have the highest hedge ratio, which is confirmed by the hedging effectiveness. In contrast, oil and stocks exhibit the lowest hedging effectiveness. Our findings imply that financial assets might have a heterogeneous relationship with green bonds. Furthermore, despite its infancy, it seems that the role of green bond during a crisis should not be ignored, as it can be a hedger for some assets, while a contagion amplifier during crisis times.
Highlights
COVID-19 has morphed from a health crisis to an economic crisis that affected the global economy through several channels
We find that the green bond index is strongly connected with the United States dollar index (USD) and bond during the full sample, ket, which is in line with Reboredo and Ugolini (2020)
We suggest that investors search for alternative financial instruments to hedge against COVID risk, other than conventional ones provided by the bond and stock market
Summary
COVID-19 has morphed from a health crisis to an economic crisis that affected the global economy through several channels. (2020) found an insignificant correlation between COVID-19 and socioeconomic factors like GDP per capita and the human development index for the countries: India, United States, Brazil, Argentina, France, Colombia, Russia, Israel, United Kingdom, and Peru Another case by Dash et al (2021) on BRICS economies (Brazil, Russia, India, China, and South Africa) shows that economic growth is insignificant with COVID-19. Previous studies argue that more green bond trading can support lowcarbon projects, which reduces environmental degradation significantly (Monasterolo and Raberto, 2018) This results in having a cleaner environment and lower negative effects of climate change (Gevorkyan et al, 2016; Flaherty et al, 2017; Orlov et al, 2018). Focusing on Goal 13: Climate Action, this study followed the call, policies and implication of Kyoto Protocol (1997) and Paris Agreement (2015) through the mitigation of the global pollution (CO2 emissions)
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