Energy markets and green bonds: A tail dependence analysis with time-varying optimal copulas and portfolio implications. (December 2021)

• Record Type: Journal Article
• Authors: Naeem, Muhammad Abubakr; Bouri, Elie; Costa, Mabel D.; Naifar, Nader; Shahzad, Syed Jawad Hussain
• Is Part Of: Resources policy. Volume 74(2021)
• Publication Date: 2021-12
• Subjects: Green bonds -- Energy commodities -- Asymmetric tail dependence -- Time-varying optimal copula -- Extreme spillovers -- Hedging -- Conditional diversification benefits; G11 -- Q41 -- Q43; Mines and mineral resources -- Periodicals; Ressources minérales -- Périodiques; Ressources naturelles -- Gestion -- Périodiques; Environnement -- Politique gouvernementale -- Périodiques; 333.8
• DOI: 10.1016/j.resourpol.2021.102418
• Languages: English
• ISSNs: 0301-4207

Abstract

Abstract: We examine the asymmetric and extreme tail dependence between five energy markets (crude oil, natural gas, heating oil, gasoline, and coal) and green bonds using a time-varying optimal copula (TVOC) model. The results indicate the existence of multiple tail dependence regimes, implying the unsuitability of applying static or dynamic models to entirely describe the extreme dependence between energy markets and green bonds. There is an extreme negative tail dependence between green bonds and four energy commodities (crude oil, heating oil, gasoline, and coal), whereas an extreme positive tail dependence is shown for green bonds and natural gas. Largely, stressful periods such as the COVID19 outbreak, shape the tail dependence, which is also the case for extreme risk spillovers involving, especially, crude oil. Hedging effectiveness analysis indicates that green bonds can effectively hedge most of the energy commodities. The conditional diversification benefits seem to vary with time, especially for natural gas, and differ across the energy markets. Notably, green bonds provide higher conditional diversification benefits when combined with coal for several portfolio weights. Highlights: We investigate the extreme tail dependence between five energy and green bonds. We use a time-varying optimal copula (TVOC) model. We find extreme negative tail dependence between green bonds, crude oil, heating oil, gasoline, and coal. We find an extreme positive tail dependence between green bonds and natural gas.