Do Green Bonds Act as a Hedge or a Safe Haven against Economic Policy Uncertainty? Evidence from the USA and China

Inzamam Ul Haq,Supat Chupradit,Chunhui Huo

doi:10.3390/ijfs9030040

Abstract

Economic policy uncertainty and particularly COVID-19 has stimulated the need to investigate alternative avenues for policy risk management. In this context, this study examines the dynamic association among economic policy uncertainty, green bonds, clean energy stocks, and global rare earth elements. A dynamic conditional correlation-multivariate generalized autoregressive conditional heteroscedasticity (DCC-MGARCH) model was used to gauge the time-varying co-movements among these indices. The analysis finds that green bonds act more as a hedge than a safe haven against economic policy uncertainty (EPU). In the case of diversification, green bonds work as diversifiers with clean energy stocks and rare earth elements during COVID-19 and in the whole sample period. Additionally, clean energy stocks and rare earth elements show safe haven properties against EPUs. This study contributes to the hedging and safe haven literature with some new insight considering the role of green bonds and clean energy stocks. Additionally, the outcomes of the research contribute toward the literature of portfolio diversification theory. These findings pave the way for not only US investors to hedge long-term economic policy risk by investing in green bonds, but also for China and the UK, as these financial assets (green bonds, clean energy stocks, and rare earth metals) and EPU are long-term financial and economic variables.

Highlights

Economic policy uncertainty (EPU) is termed an independent nature of risk associated with the financial system of countries due to the undefined pathways of fiscal, monetary, and other regulatory policies (Baker et al 2016)
This study considered the daily prices of green bonds (GB), clean energy stock (CES), the global rare earth elements (REE) index and three EPU indices (US-EPU, China-EPU, and United Kingdom-EPU)
This study revealed that green bonds are a strong hedge against clean energy stocks, rare earth elements, China-EPU and UK-EPU

Summary

Introduction

Economic policy uncertainty (EPU) is termed an independent nature of risk associated with the financial system of countries due to the undefined pathways of fiscal, monetary, and other regulatory policies (Baker et al 2016). Financial integration and global trade wars among countries have increased economic policy uncertainty (Al-Thaqeb and Algharabali 2019; Wang et al 2019a). The current COVID-19 crisis continues to raise economic policy uncertainty in the United States, and appears to be a more catastrophic event than the global financial crisis and European debt crisis (Baker et al 2020). The current financial and economic crisis due to COVID-19 remains a heated topic among scholars and policymakers around the world (Abdelrhim et al 2020)

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Conclusion