Green Bond, Renewable Energy Stocks and Carbon Price: Dynamic Connectedness, Hedging and Investment Strategies during COVID-19 pandemic

42 Pages Posted: 5 Aug 2021

See all articles by Aviral Kumar Tiwari

Aviral Kumar Tiwari

Rajagiri Business School

Emmanuel Joel Aikins Abakah

University of Cape Coast

David Gabauer

Software Competence Center Hagenberg

Richard Adjei Dwumfour

Curtin University

Date Written: August 1, 2021

Abstract

This study has been inspired by the emergence of socially responsible investment practices in mainstream investment activity wherein it examines the transmission of return patterns between green bonds, carbon prices, and renewable energy stocks using daily data spanning from 1st January 2013 to 22nd September 2020. In this study, our dataset comprises the price indices of S&P Green Bond, Solactive Global Solar, Solactive Global Wind, S&P Global Clean Energy and Carbon. We employ the TVP-VAR approach to investigate the return spillovers and connectedness, and various portfolio techniques including minimum variance portfolio, minimum correlation portfolio and the recently developed minimum connectedness portfolio to test portfolio performance. Additionally, a LASSO dynamic connectedness model is used for robustness purposes. The empirical results from the TVP VAR indicate that the dynamic total connectedness across the assets is heterogeneous over time and economic event dependent. Moreover, our findings suggest clean energy dominates all other markets and is seen to be the main net transmitter of shocks in the entire network with Green Bonds and Solactive Global Wind emerging to be the major recipients of shocks in the system. Based on the hedging effectiveness, we show that bivariate and multivariate portfolios significantly reduce the risk of investing in a single asset except for Green Bonds. Finally, the minimum connectedness portfolio reaches the highest Sharpe ratio implying that information concerning the return transmission process is helpful for portfolio creation. The same pattern has been observed during the COVID-19 pandemic period.

Keywords: COVID-19, TVP-VAR, dynamic connectedness, portfolio management, hedging effectiveness, green bonds, renewable energy stocks, carbon price

JEL Classification: C32, C51, G15

Suggested Citation

Tiwari, Aviral Kumar and Aikins Abakah, Emmanuel Joel and Gabauer, David and Dwumfour, Richard Adjei, Green Bond, Renewable Energy Stocks and Carbon Price: Dynamic Connectedness, Hedging and Investment Strategies during COVID-19 pandemic (August 1, 2021). Available at SSRN: https://ssrn.com/abstract=3897284 or http://dx.doi.org/10.2139/ssrn.3897284

Aviral Kumar Tiwari (Contact Author)

Rajagiri Business School ( email )

Rajagiri Business School
Rajagiri Valley Road
Kochi, 682039
India
09696357274 (Phone)
682039 (Fax)

HOME PAGE: http://https://www.rajagiribusinessschool.edu.in/

Emmanuel Joel Aikins Abakah

University of Cape Coast

PMB, UCC, GHANA
Cape Coast, Central Region PMB
Ghana

David Gabauer

Software Competence Center Hagenberg ( email )

Softwarepark 21
Hagenberg im Mühlkreis, Upper Austria 4232
Austria

HOME PAGE: http://https://www.scch.at/

Richard Adjei Dwumfour

Curtin University ( email )

Perth, WA
Australia

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