Diversifier or More? Hedge and Safe Haven Properties of Green Bonds During COVID-19

Abstract

Against the backdrop of the Covid-19 pandemic, this study explores the hedging and safehaven potential of green bonds for conventional equity, fixed income, commodity, and forex investments. We use the cross-quantilogram approach that provides a better understanding of the dynamic relationship between assets under different market conditions. Our full sample results show that the green bond index could serve as a diversifier asset for medium-and long-term equity investors. Besides, it can also serve as a hedging and safe haven instrument for currency and commodity investments. Moreover, the sub-sample analysis of the pandemic crisis period shows a heightened short-and medium-term lead-lag association between the green bond index and conventional investment returns. However, the green bond index emerges as a significant hedging and safe-haven asset for the long-term investors of conventional financial assets. Our results offer insights for long-term investors whose portfolios comprise conventional assets such as equities, commodities, forex, and fixed income securities. Further, our findings reveal the potential role that the green bond investments could play in global financial recovery efforts without compromising the low-carbon transition targets.

Quantifying the hedge and safe-haven properties of bond markets for cryptocurrency indices

“…Our findings coincide with Kuzemko et al. (2020) and Arif et al. (2021b), who suggest that SPGB does not provide any hedging or safe-haven investment opportunity during the short- and medium-run diversification potential incurs losses for the short-term investors.…”

“…Thus, SPGB can act as a strong diversifier for cryptocurrency indices following the ongoing global pandemic in line with Arif et al. (2021a, b).…”

“…(2021) examined the spillovers between conventional equities and Sukuk and concluded that Sukuk offers safe-haven properties for various fixed-income conventional equity markets. In another study, Arif et al. (2021b) assessed the safe-haven features of green bonds for other financial markets and reported that green bonds hold significant hedge and safe-haven characteristics that shield the investments from uncertain circumstances.…”

“…Green bonds, having similar features of conventional bonds, are used to finance environmentally friendly projects (Naeem et al. , 2021b, c; Flammer, 2021; Arif et al. , 2021b, c; Karim et al.…”

“…Arif et al. (2021a, b) provided evidence that green bonds are effective diversifiers for various investments when unfavorable market circumstances. Naeem and Karim (2021) reported hedge facility of green markets for bitcoin, and Naeem et al.…”