Abstract:
This study investigates the safe-haven role of Chinese green bonds against the Chinese
industrial sectors' returns over the period of December 16, 2018, to December 14, 2023.
By considering significance of financial investments and environmental considerations in
global financial markets, understanding the potential of green bonds as a safe-haven asset
is very important. To evaluate the performance of Chinese green bonds during extreme
market conditions, the study employs a recently introduced cross quantilogram (CQ)
approach. Furthermore, this research utilizes BEKK models to investigate the spillover
effects between Chinese green bonds and industrial sectors that shed light on the
interconnectedness within different markets. In doing so, the study contributes to the
valuable knowledge of risk management strategies in financial markets. In a practical
context, the calculation of hedge ratios and assessment of hedging effectiveness are integral
components of this research, offering a nuanced understanding of the magnitude and
viability of utilizing Chinese green bonds as an investment decision tool. The findings of
CQ predict that Chinese green bond provides a strong safe haven against Chinese health,
financial and real estate sectors for short-term investment horizon. It means that the risk
associated with these sectors can be offset by making investments in green bond. However,
green bond can be used to minimized the risk associated to energy, materials, industrials,
consumer discretionary, information technology, communications services, utilities, and
consumer staples sectors in short term period. Similarly, the findings of BEKK model
confirm that conditional variances of all sector returns are affected by the level of their past
conditional variances. Moreover, there is a bi-directional volatility effect for all sectors.
The highest mean hedge ratio between green bond and financials has been found, thus,
providing a greater hedging opportunity. Afterward, the green bond with health care and
x
consumer discretionary has a higher mean hedge ratio. The findings of this study hold
significance for investors, financial institutions, and policymakers seeking to navigate
volatile markets while incorporating sustainable investment practices.
