Do Green Bonds Affect Extreme Spillover and Hedging Effects Across Stocks and Commodities?

Abstract

This study investigates the extreme connectedness network among Green bonds, stocks and commodities and its implications for portfolio diversification during the turbulent periods. To this end, we implement the novel QVAR methodology by Ando, Greenwood-Nimmo, and Shin to study the connectedness at the median, extreme lower, and extreme upper quantiles. The results reveal dynamic spillovers among markets. Interestingly, static spillover effects are stronger for the extreme upper and lower quantiles than for the intermediate quantiles. Commodities are the major net transmitters, whereas Shanghai Stock Exchange green bond is the net receiver of shocks in the system. These results are supported by the findings of portfolio management analyses, which suggest that Green bonds and gold could function as potential diversification assets, serving as safe havens, particularly for the stock and Brent markets. Our study provides valuable insights for investors aiming to optimize their hedging strategies, guiding risk management, and portfolio diversification.