Price connectedness between green bond and financial markets

Reboredo, Juan C.; Ugolini, Andrea

doi:10.1016/j.econmod.2019.09.004

Cited by 338 publications

(160 citation statements)

References 35 publications

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“…However, little evidence is there regarding the connectedness of ESG leader investments. Reboredo and Ugolini (2019) is a notable exception who investigated the connectedness between green bonds and financial markets by using a structural vector autoregressive model. Their empirical findings show that the green bond market is a net spillover receiver, while treasury and currency markets are net spillover transmitters.…”

Section: Literature Reviewmentioning

confidence: 99%

The static and dynamic connectedness of environmental, social, and governance investments: International evidence

2020

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We investigate the connectedness of the most significant global equity indices that comprise companies with the highest environmental, social, and governance (ESG) performance. Motivated by the rapid growth of socially responsible investing during the last two decades, we examine whether these investments are prone to similar exogenous economic and financial shocks as their conventional counterparts. Employing a variety of influential macroeconomic and financial variables over the period 10/1/2007–4/15/2020, we document statistically significant and consistent transmissions between the employed equity indices throughout the sample period. In particular, the connectedness exhibits dynamic patterns during three periods: the European sovereign debt crisis, the systemic Greek problems, and the outbreak of the coronavirus pandemic. We also find that developed equity markets are the shock transmitters to Asian and other emerging markets. Our results highlight the risk of contagion and the diminishing portfolio diversification benefits of these equity indices during turbulent periods.

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Section: Literature Reviewmentioning

confidence: 99%

The static and dynamic connectedness of environmental, social, and governance investments: International evidence

2020

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“…However, the green bonds market is weakly linked to these markets, such as stock, energy, and high-yield corporate bond markets. The research of Reboredo et al [27] further provided a similar result to that of Reboredo and Ugolini [26] by using wavelet coherence methods; their finding suggested a strong connectedness between green bonds and treasury and corporate bonds over different time horizons and in the European Union (EU) and the United States (US); they found a weak linkage between green bonds and high-yield corporate bonds and stock and energy assets in the short and long term. Recently, Jin et al [28] made the first attempt to investigate the relationship between carbon futures and green bonds, as well as other three markets; this finding supported the evidence of the fact that the green bond market is the effective hedge for carbon futures and has performed well in periods of crisis.…”

Section: Literature Reviewmentioning

confidence: 54%

“…This finding suggested a strong linkage between the treasury and corporate bond markets, and a weak connection between stock and energy commodity markets. Likewise, Reboredo and Ugolini [26] employed the value-at-risk (VaR) approach and discovered the price correlation between green bonds and financial markets. This study provided evidence that the green bond market is closely related to the fixed income and currency markets, resulting in a considerable price spillover effect and a negligible reverse effect.…”

Section: Literature Reviewmentioning

confidence: 99%

Co-movement and Lead–Lag Relationship Between Green Bonds and Renewable Energy Stock Markets: Fresh Evidence from the Wavelet-Based Approach

Liu

2020

Preprint

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Background: A recent study in Nature Climate Change shows that due to reduced human activities during the Coronavirus disease 2019 (COVID-19) pandemics, daily global emissions of carbon dioxide decreased by 17% from the average level in 2019. With the gradual recovery of economic activity and human energy consumption, the emissions of greenhouse gas and pollution would rise again. Green bonds are considered a crucial tool to release climate finance. The green bond market can act as an essential bridge between capital providers (i.e. institutional investors) and sustainable assets (i.e. renewable energy).This study is the first attempt to examine co-movement and the lead–lag relationship between green bonds and global and sector renewable energy stock markets in the time and frequency horizons. We apply continuous wavelet, wavelet coherence, and line and non-line causality approaches on data during the period 2010–2020, coincidentally including the COVID-19 pandemic.Results: (1) Green bonds and renewable energy markets show evidence of a similar pattern based on the wavelet power spectrum, which shows high price volatility at small and medium scales, especially during periods of turbulence and crisis. (2) The dynamic connection between green bonds and renewable energy returns is weak (strong) on the short (long) time-scale. However, on medium-term time scales, the dependence between them is significant only during turbulent periods, such as the European Sovereign Debt Crisis 2012 (ESDC) and the COVID-19 pandemic. (3) With regard to causality, our results show unidirectional and bidirectional linear (non-linear) causality at low and high frequencies. Moreover, our finding reveals the fact regarding the lead–lag relationship that, most of the time and frequencies, no one market necessarily dominates the other.Conclusion: Our findings provide several remarkable policies and practical implications for market regulators and investors. Institutional investors can benefit by including green bonds in their portfolios to decrease their climate change risk and improve their environmental, social, and corporate governance rating in the portfolio. Considering that the dependence between green bonds and renewable energy stock prices varies over various time scales, investors with different investment horizons should make diverse investment portfolio and hedging choices. The finding is also relevant for formulating green finance policies and supporting renewable energy investments. Policy decisions on the transition of energy to a decarbonized economy should consider the consequences for green bonds, which are also critical for the transition to a climate-resilient economy.

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“…On the other hand, the green bond literature largely focuses on studying the link between green bond prices and financial markets. In this regard, the empirical findings of [26] reveal that the green bond market is closely related to fixed income and currency markets, while it is weakly correlated with the stock, energy, and high-yield corporate bond markets. The authors of [2] focus on the analysis of the returns, volatility, and liquidity of green bonds, as well as the key role of third-party verification on private and institutional issues.…”

Section: Theoretical Backgroundmentioning

confidence: 99%

“…The study conducted by [26] has implications in terms of portfolio and risk management decisions for environmentally conscious investors holding positions in green bonds. In this vein, [32] states that green bonds have negligible diversification benefits for investors in corporate and treasury markets, and considerable diversification benefits for investors in stock and energy markets.…”

Section: Theoretical Backgroundmentioning

confidence: 99%

On the Effect of Green Bonds on the Profitability and Credit Quality of Project Financing

Alonso‐Conde

Rojo-Suárez

2020

Sustainability

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The relatively recent green bond market is increasingly attracting interest at the technical, regulatory, and academic research levels. Although a considerable body of research on green bonds focuses on the investor’s perspective, this study takes the perspective of a project finance sponsor to analyze whether there is a direct financial incentive for issuing green bonds in contrast to other types of financing. In order to measure the impact of green bond financing on the profitability and solvency of environmentally friendly investments, we study the sensitivity of the financial performance of a well-established project finance investment—the Sagunto regasification plant—to shifts in its financial structure. In particular, we develop a base case that allows us to study the impact of green financing compared to other financial structures typically used in project finance, under different scenarios. Our results show that in all cases, the internal rate of return (IRR) for shareholders is higher when green bonds instead of bank loans are issued to finance investments. Additionally, in the vast majority of the scenarios, green bond financing results in higher average debt service coverage ratios. Consequently, our results suggest that green bond financing constitutes a strong financial incentive for sponsors, which can help align their objectives with those of public authorities.

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Price connectedness between green bond and financial markets

Cited by 338 publications

References 35 publications

The static and dynamic connectedness of environmental, social, and governance investments: International evidence

The static and dynamic connectedness of environmental, social, and governance investments: International evidence

Co-movement and Lead–Lag Relationship Between Green Bonds and Renewable Energy Stock Markets: Fresh Evidence from the Wavelet-Based Approach

On the Effect of Green Bonds on the Profitability and Credit Quality of Project Financing

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