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

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.

Green Bond: A Systematic Literature Review for Future Research Agendas

“…It is essential for scholars to investigate this field of research for hedging evidence, which is shown by green bonds when compared with "dirty" financial instruments (Saeed et al 2020) and "dirty" energy commodities (Naeem et al 2021). Furthermore, the green bond seems to have risk mitigation characteristics against long-term economic policy uncertainty, particularly during the COVID-19 outbreak (Haq et al 2021). This latter field of study can exploit an interesting potential upside due to the limited works conducted.…”

Economic Policy Uncertainty and Cryptocurrency Market as a Risk Management Avenue: A Systematic Review

“…Additionally, several studies have been based on risk management role against EPU. The role of cryptocurrencies as shielding the volatility of green and sustainable financial assets such green bonds (Haq et al 2021), clean energy stocks, EGS stocks has been ignored. Likewise, the linkage of EPU with metals such as precious metals, national indexes of rare earth metals, individual rare earth metals.…”

“…The global infection has harmed individual investors, institutional investors. The current financial and economic crisis lingers as a controversial topic among investors and scholars around the globe (Abdelrhim Risks 2021, 9, 163 2 of 24 et al 2020; Awan et al 2021;Baker et al 2020;Haq et al 2021;Haq and Awan 2020). Understanding the notion of uncertainties and risks (either micro, macro-economic, financial, or other security-specific) is a predominant feature in financial markets.…”

“…Understanding the notion of uncertainties and risks (either micro, macro-economic, financial, or other security-specific) is a predominant feature in financial markets. Investors around the world are worried about the effectiveness of risk management and avenues utilized to mitigate it (Haq et al 2021). Investors are risk-averse and avoid loss, hence are always looking forward to diminish the potential uncertainties in their investments.…”

“…While talking about the global financial crisis, the Eurozone serial crisis, and other events of higher uncertainty (Baker et al 2016) argued that fears and worries about policy uncertainty intensified in awakening a sharp economic downfall between 2008-2009. Particularly, in higher periods of economic uncertainty, either investors restrict their investments, wait for current conditions to be settled down, or look to find suitable strategies to mitigate uncertainty around the globe. Interestingly, the cryptocurrency market appeared as a risk management tool for the domestic and international investors of stock and commodity markets around the globe, particularly during the period of higher uncertain events (Akhtaruzzaman et al 2021a(Akhtaruzzaman et al , 2021bAl Mamun et al 2020;Ariefianto 2020;Bouri et al 2017aBouri et al , 2017bBouri et al , 2020bBouri et al , 2017cBouri et al , 2017dBouri et al , 2018Bouri and Gupta 2019;Cheema et al 2020;Chen et al 2021;Colon et al 2021;Demir et al 2018;Fang et al 2020;Fasanya et al 2021;Haq et al 2021;Hasan et al 2021;Jiang et al 2021;Kalyvas et al 2020;Nguyen 2020;Koumba et al 2020;Lucey et al 2021;Matkovskyy et al 2020;Mokni et al 2020;Nie et al 2020;Papadamou et al 2021;Park and Chai 2020;Paule-Vianez et al 2020;Wang et al 2019b;Qin et al 2021;Raheem 2021;Rubbaniy et al 2021;Wang ...…”