Safe Haven Investment in Green Bond against Chinese Sectoral Stocks: Portfolio Diversification Perspective

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.