Interdependence between Green Financial Instruments and Major Conventional Assets: A Wavelet-Based Network Analysis

Román Ferrer,Vicente J Bolós,Rafael Benítez

doi:10.3390/math9080900

Abstract

This paper examines the interdependence between green financial instruments, represented by green bonds and green stocks, and a set of major conventional assets, such as Treasury, investment-grade and high-yield corporate bonds, general stocks, crude oil, and gold. To that end, a novel wavelet-based network approach that allows for assessing the degree of interconnection between green financial products and traditional asset classes across different investment horizons is applied. The empirical results show that green bonds are tightly linked to Treasury and investment-grade corporate bonds, while green stocks are strongly tied to general stocks, regardless of the specific time period and investment horizon considered. However, despite their common climate-friendly nature, there is no a remarkable association between green bonds and green stocks. This means that these green investments constitute basically two independent asset classes, with a distinct risk-return profile and aimed at a different type of investor. Furthermore, green financial products have a weak connection with high-yield corporate bonds and crude oil. These findings can have important implications for investors and policy makers in terms of investment decision, hedging strategies, and sustainability and energy policies.

Highlights

The aim of this paper is to examine the degree of interconnection between green financial instruments, which are represented by green bonds and green stocks, and a set of major conventional assets, including ordinary government, investment-grade and highyield corporate bonds, general stocks, crude oil and gold, from a multiscale perspective
We first present and discuss the network graphs of green financial instruments and conventional asset classes based on the squared wavelet coherence for the entire sample period
This paper explores the interdependence between the two most important green financial instruments, namely green bonds and green stocks, and a group of major mainstream asset classes, such as Treasury, investment-grade and high-yield corporate bonds, general equities, crude oil, and gold, over various investment horizons

Summary

Introduction

Publisher’s Note: MDPI stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. Climate change has become one of the priority challenges that humanity faces in the twenty-first century. In order to avoid the devastating effects of climate change on human life and ecosystems, it is vital to adopt rapid and large-scale actions that reduce fossil fuels’. Green bonds and green stocks constitute the two major environmental-friendly financial instruments and are expected to play a critical role in mobilizing the staggering amount of capital required to finance the massive transformational projects needed to the transition to a low carbon economy

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