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A memory in the bond: Green bond and sectoral investment interdependence in a fractionally cointegrated VAR framework

A memory in the bond: Green bond and sectoral investment interdependence in a fractionally cointegrated VAR framework
A memory in the bond: Green bond and sectoral investment interdependence in a fractionally cointegrated VAR framework
The urgency surrounding environmental sustainability has triggered an innovation of financing channels for climate and environmental projects. Green bond as one such channel has garnered immense interest from investors, with an implicit view that this fixed-income instrument is a relatively safer choice as an investment portfolio. Yet, the uncomfortable spread of greenwashing as a marketing spin has subjected green bonds to significant market volatility,
at least as much as other financial assets or sectoral indices if not more. Whether green bonds as a financial instrument may incur losses to the extent of the loss in various sector indices, can be gauged by studying the nature of their contemporaneous growth. In this paper, we use daily data on green bonds and several S&P sectoral indices and a fractionally cointegrated vector
autoregression framework (FCVAR) to study the extent to which green bonds dynamically co-move with various sectoral indices. Such a co-movement, if any, would elicit the extent to which a variation of uncertainty would determine an investor’s inclination to the diversification of a portfolio between an investment in a sectoral index and a green bond. The identifying mechanism is the shock-dissipation speed, which also informs a policymaker before choosing
the right instrument to stabilise the system. We show that the system-wide shocks indeed dissipate slower than could be predicted by a conventional cointegrated VAR system. Further, the property of the slow error correction within the dynamic system of Green Bond and sectoral S&P indices, for instance, may demonstrate the speed of adjustment of the global economy to
sudden shocks. Rigorous predictions exercises complement our baseline conclusions.
0140-9883
Mishra, Tapas
218ef618-6b3e-471b-a686-15460da145e0
Park, Donghyun
1b16f63e-2f0e-42eb-be7a-b3e1394090f0
Parhi, Mamata
5e489f1d-9fe0-44b3-8027-bfa3ec6bfbd4
Uddin, Gazi Salah
d8d14ca8-3479-4eb4-a1cd-1df009424ef2
Tian, Shu
508cf1c0-2e51-4be2-a4e7-c981366454e4
Mishra, Tapas
218ef618-6b3e-471b-a686-15460da145e0
Park, Donghyun
1b16f63e-2f0e-42eb-be7a-b3e1394090f0
Parhi, Mamata
5e489f1d-9fe0-44b3-8027-bfa3ec6bfbd4
Uddin, Gazi Salah
d8d14ca8-3479-4eb4-a1cd-1df009424ef2
Tian, Shu
508cf1c0-2e51-4be2-a4e7-c981366454e4

Mishra, Tapas, Park, Donghyun, Parhi, Mamata, Uddin, Gazi Salah and Tian, Shu (2023) A memory in the bond: Green bond and sectoral investment interdependence in a fractionally cointegrated VAR framework. Energy Economics, 121, [106652]. (doi:10.1016/j.eneco.2023.106652).

Record type: Article

Abstract

The urgency surrounding environmental sustainability has triggered an innovation of financing channels for climate and environmental projects. Green bond as one such channel has garnered immense interest from investors, with an implicit view that this fixed-income instrument is a relatively safer choice as an investment portfolio. Yet, the uncomfortable spread of greenwashing as a marketing spin has subjected green bonds to significant market volatility,
at least as much as other financial assets or sectoral indices if not more. Whether green bonds as a financial instrument may incur losses to the extent of the loss in various sector indices, can be gauged by studying the nature of their contemporaneous growth. In this paper, we use daily data on green bonds and several S&P sectoral indices and a fractionally cointegrated vector
autoregression framework (FCVAR) to study the extent to which green bonds dynamically co-move with various sectoral indices. Such a co-movement, if any, would elicit the extent to which a variation of uncertainty would determine an investor’s inclination to the diversification of a portfolio between an investment in a sectoral index and a green bond. The identifying mechanism is the shock-dissipation speed, which also informs a policymaker before choosing
the right instrument to stabilise the system. We show that the system-wide shocks indeed dissipate slower than could be predicted by a conventional cointegrated VAR system. Further, the property of the slow error correction within the dynamic system of Green Bond and sectoral S&P indices, for instance, may demonstrate the speed of adjustment of the global economy to
sudden shocks. Rigorous predictions exercises complement our baseline conclusions.

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Accepted/In Press date: 12 March 2023
e-pub ahead of print date: 14 April 2023
Published date: 1 May 2023
Additional Information: Publisher Copyright: © 2023

Identifiers

Local EPrints ID: 476910
URI: http://eprints.soton.ac.uk/id/eprint/476910
ISSN: 0140-9883
PURE UUID: 80ed5ecb-bd82-4072-a15b-54e3b5586237
ORCID for Tapas Mishra: ORCID iD orcid.org/0000-0002-6902-2326

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Date deposited: 19 May 2023 16:33
Last modified: 17 Mar 2024 03:36

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Contributors

Author: Tapas Mishra ORCID iD
Author: Donghyun Park
Author: Mamata Parhi
Author: Gazi Salah Uddin
Author: Shu Tian

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