Green Investments Under Uncertainty : - A cross-quantilogram approach

University essay from Linköpings universitet/Nationalekonomi; Linköpings universitet/Nationalekonomi

Abstract: In this study, we analyze the quantile dependence for green bond returns and renewable energy stock returns with three major asset classes: corporate bonds, stocks and oil. Furthermore, we control the dependence structure for technology, uncertainties as well as lag structures and time-varying effects. We apply the cross-quantilogram developed by Han et al. (2016) that allows us to study the dependence structures between two time series in arbitrary quantiles. The results led us to three key findings: 1) The returns of thegreen bond market are tail-dependent on the returns of both long and short-term maturities for the corporate bond market but are not dependent on the stock market nor the oil market. The tail-dependence indicates that while investors may hold green bonds due to moral incentives, it is not enough during times of turbulence. Further, the dependence structures are short-lived. 2)The renewable energy market is dependent on oil returns of similar quantiles, suggesting that renewable energy substitutes oil when oil prices increase. However, renewable energy does not influence the oil market, indicating that oil is not a substitutional energy source for renewable energy driven firms. Renewable energy stocks are further highly dependent on the returns of the general stock market but are not influenced by the returns on the corporate bond market. 3) The dependence of both renewable energy and green bonds with the asset markets are time-varying. Our overall results obtained by this paper provides information that could help facilitate new investment allocations towards green investments. Further, the results may have immediate and important implications for investors. For those in the corporate bond market, adding green bonds does not add diversification benefits during turbulence. Similarly, renewable energy stock does not add diversification benefits to investors in the oil or stock market.

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