Study On The Dependency And Risk Spillover Effects Between Green Bonds And Related Assets

It is now an important political consensus in the international community to tackle climate change together.China has proposed to achieve a carbon peak by 2030 and carbon neutrality by 2060.The "double carbon" target has become the strategic direction for China’s low-carbon development transition during the 14 th Five-Year Plan period and even in the long term.To this end,China has incorporated the "double carbon" target into the overall layout of ecological civilization construction,emphasized on improving the green financial policy framework and incentive mechanism,and promoted the development of green financial markets.As an important part of the green financial system,the green bond market has seen a new opportunity for development and has achieved remarkable results.However,the rapid growth of green bonds has raised particular concerns among investors and other economic agents about their risks and returns.Furthermore,it is worth further examining whether green bonds can be used as an effective risk hedging tool for investors.As market participants focus on differences in investment horizons and action cycles,the transmission mechanism of price fluctuations between the green bond market and the connected markets is characterized by heterogeneity on multiple time scales,and the complex network relationships formed by external macroeconomic factors and major crisis events,the risk management of the green bond market poses new challenges.Therefore,given the complex interaction system between green bonds and related assets,clarifying the risk transmission mechanism between markets is an important theoretical reference and practical guidance for market risk regulation and early warning,as well as investment portfolio risk management.Unlike the existing studies which focus on the risk transmission mechanism between a single green bond market and the traditional financial and energy markets and the risk transmission effect measurement method which focuses on a unilateral time dimension,the thesis is based on both time and frequency domain research perspectives to investigate the original time series and multi-scale interdependence and risk transmission mechanism between the green bond market and the traditional financial,energy and green industry markets.Theoretical analysis and empirical research are conducted.Firstly,the study analyses the time-frequency dependency characteristics between green bonds related markets,and identifies the sudden structural changes in the dynamic dependencies and the major crisis events affecting them.Secondly,the DY and BK spillover indices and the Co Va R risk spillover methodology are used to measure the risk spillover effects of green bonds and related assets at three levels: return,volatility,and extreme risk,and to examine the impact of external macroeconomic factors and major crisis events on risk transmission.Finally,the efficiency of green bond market risk aversion under different portfolio weights is further investigated to see whether green bonds can be used as an effective portfolio and hedging tool.The main findings and conclusions of the thesis are as follows.(1)A theoretical framework of the risk transmission mechanism between green bonds and related assets is constructed.This thesis comprehensively and systematically explains the risk transmission paths between green bond markets and related markets from two perspectives: the real economy impact path and the financial risk transmission path.Based on the essence of traditional financial risks and risk transmission mechanisms,this thesis examines the multi-scale properties of the price fluctuations of green bond and related assets,clarifies the multi-scale risk transmission mechanism between them,forms an innovative mechanism reflecting the characteristics and evolution mechanism of risk transmission between green bonds and related assets,and expands the theoretical approach to the study of the linkage between green bonds and internal and external related assets.(2)The thesis characterises the time-frequency dependence between green bonds and related assets in terms of the degree and structure of dependence,and examines major crisis events that cause changes in the structure of dependence by means of structural mutation points.The results show that there is a positive time-varying dependence between green bonds and related markets(except money markets)and an asymmetric(symmetric)tail dependence between green bonds and commodities,oil and green fuels markets(other markets),and identify five additional major crisis events that cause changes in dependence.In addition,based on the wavelet analysis method from a multi-timescale perspective,the price volatility in each market diminishes as the frequency decreases,and the continuous wavelet power spectrum shows that price volatility is mainly distributed at low and medium scales.The results of the cross wavelet transform conclude that the correlation between green bonds and related assets is more affected by short-term shocks than by long-term persistent changes.As the development of the green bond market is not yet mature,its "green" attributes have not been well demonstrated,and the linkage with the green industry market is relatively weak.In addition,the relationship between green bonds and related assets is stronger in times of crisis and turbulence.(3)The extent and direction of information spillovers between green bonds and related assets are analyzed in both the time and frequency domains respectively,using both DY and BK methods,combined with the rolling window technique,and the extreme risk spillover effect is further investigated.The findings show that the information spillover across the system is more pronounced at the yield level.Green bonds play the role of a net recipient of information spillovers at both the return and volatility levels.For the green bond market,the most prominent contributor is the money market,followed by the treasury and high-yield bond markets.This shows that green bonds are more closely linked to traditional assets and their "financial" attributes are more evident.From a frequency domain perspective,the risk spillover effect tends to increase from high,medium and low frequencies,indicating that there is an obvious short-term risk transmission between green bonds and related assets.From a dynamic perspective,aggregate spillovers are constantly changing over time,with the extent of information spillovers increasing significantly in periods of financial turmoil.Information spillovers between green bonds and related markets are mainly driven by short-term transmission of shocks.In addition,green bonds are net recipients of most green industry equity markets,suggesting that the pattern of transmission from equity to bond markets continues to be followed in the overall green market environment.In addition,there are significant upside and downside risk spillovers from other markets to the green bond market.(4)The thesis distinguishes between uncertainty and financial risk macroeconomic factors and explores the impact of these two types of macroeconomic factors on spillover indices at short-,medium-and long-term scales respectively,and in turn finds out whether there are significant differences in the macroeconomic influences on risk spillovers for different frequency domains.Overall,uncertainty macroeconomic factors make the highest contribution to the total return and volatility spillover indices,while the contribution of financial risk-based macroeconomic factors is relatively weak.Risk spillovers in different frequency domains are influenced differently by macroeconomic factors.In addition,based on the BEKK-GARCH model and volatility impulse response functions(VIRFs),the impact of major historical events on the information spillover mechanism in the system is analyzed.Major events exacerbate market price movements and affect investors’ psychological expectations and uncertainty about the future,causing volatility transmission among markets.Among them,the volatility spillover between green bonds and related assets is most affected by the new crown pneumonia outbreak.(5)For dynamically optimally weighted portfolios,green bonds are effective in diversifying risk with market portfolios such as currencies,equities,commodities and oil,and green equities across sectors,while for the three asset classes of Treasuries,corporate bonds and high-yield bonds,green bonds have weaker risk diversification.Conversely,for dynamically hedged portfolios,green bonds hedge against the money and treasury markets,which can significantly reduce investment risk.However,for equity,commodity,and oil markets as well as green industry equity markets,there is only a slight reduction in investment risk.Due to the outbreak of the new crown epidemic pneumonia in 2020,the portfolio and hedging ratios experience significant volatility.Based on extreme downside risk calculations,the efficiency of green bonds in hedging the tail risk of the related assets improves after the outbreak of the New Crown epidemic,which means that green bonds remain a more desirable hedging tool in extreme times.On multiple time scales,portfolio risk aversion is better on medium and short-term time scales than on long-term,and not by using green bonds as an effective hedging asset for investors with a long-term horizon.Finally compared to volatility indices,gold,bitcoin,and carbon futures,the green bond market is the most effective portfolio instrument for financial and energy markets in a optimally weighted portfolio,while carbon futures is the best hedge for equity,energy and commodity markets in a dynamic hedged portfolio.The above research helps clarify the time-frequency domain risk transmission relationship and mechanism between green bonds and related assets provides a basis for investors to make flexible asset allocation decisions,helps regulators to identify the risk transmission pattern between the green bond market and other markets,improves the risk identification of the green bond market,optimizes the allocation of market resources and grasps the inter-market trading price relationship,thus maintaining the stability of the green bond market.The thesis is of practical significance to the formulation of regulatory measures.