Dynamic connectedness amongst green bonds, pollution allowance policy, social responsibility and uncertainty

Abstract

Purpose

This study explores the interconnectedness and complexity of risk-varied climate initiatives such as green bonds (GBs), emissions trading systems (ETS) and socially responsible investments (SRI). The analysis covers the period from September 2011 to August 2022, using six indices: three representing climate initiatives and three indicating uncertainty.

Design/methodology/approach

To achieve this, the study first examines dynamic lead-lag relations and correlation patterns in the time-frequency domain to analyse the returns of the series. Additionally, it applies an innovative approach to investigate the predictability of uncertainty measurements of climate initiatives across various market conditions and frequency spillovers in the short, medium and long run.

Findings

The findings indicate changing relationships between the series, increased linkages during turbulent market periods and strong co-movements within the network. The ETS is recommended for diversification and hedging against uncertainty indices, whereas the GB may be suitable for long-term diversification.

Practical implications

This study highlights the role of climate initiatives as potential hedges and contagion amplifiers during crises, with implications for policy recommendations and the asymmetric effects on market connectedness.

Originality/value

The paper answers questions that previous studies have not and contributes to the literature regarding financial risk management and social responsibility.

Citation

Alqaralleh, H. (2024), "Dynamic connectedness amongst green bonds, pollution allowance policy, social responsibility and uncertainty", Journal of Risk Finance, Vol. 25 No. 1, pp. 80-114. https://doi.org/10.1108/JRF-01-2023-0015