Interdependence between Green Financial Instruments and Major Conventional Assets: A Wavelet-Based Network Analysis

TL;DR

This study uses a wavelet-based network approach to analyze the interdependence between green financial instruments and major conventional assets across different investment horizons, revealing distinct relationships and independence between green bonds and green stocks.

Contribution

It introduces a novel wavelet-based network method to assess the dynamic interconnections between green and conventional assets across multiple time scales.

Findings

Green bonds are closely linked to Treasury and investment-grade bonds.

Green stocks are strongly connected to general stocks.

Green bonds and green stocks are largely independent assets.

Abstract

This paper examines the interdependence between green financial instruments, represented by green bonds and green stocks, and a set of major conventional assets, such as Treasury, investment-grade and high-yield corporate bonds, general stocks, crude oil, and gold. To that end, a novel wavelet-based network approach that allows for assessing the degree of interconnection between green financial products and traditional asset classes across different investment horizons is applied. The~empirical results show that green bonds are tightly linked to Treasury and investment-grade corporate bonds, while green stocks are strongly tied to general stocks, regardless of the specific time period and investment horizon considered. However, despite their common climate-friendly nature, there is no a remarkable association between green bonds and green stocks. This means that these green investments constitute basically two independent asset classes, with a distinct risk-return profile and aimed at a different type of investor. Furthermore, green financial products have a weak connection with high-yield corporate bonds and crude oil. These findings can have important implications for investors and policy makers in terms of investment decision, hedging strategies, and sustainability and energy policies.