Volatility transmission and hedging strategies across green and conventional stocks in global markets

To secure financing for climate initiatives, it is crucial to minimize the risk associated with green investments and attract investors committed to a robust, sustainable, low-carbon economy. Motivated by this need, this study investigates the volatility transmission between green and conventional stocks in the US, Europe, and China, and evaluates the effectiveness of hedging strategies for green investments. The period from June 1, 2016, to December 31, 2023, was selected to capture significant events impacting global markets, such as environmental regulations, the COVID-19 pandemic, and the Russia-Ukraine war, providing a comprehensive view of market dynamics under various conditions.

We adopted the Diebold and Yilmaz (2014) approach using a TVP-VAR model to analyze market connectedness. Additionally, we utilize multivariate portfolio techniques to assess the effectiveness of hedging strategies. Our findings reveal that the US market is the primary transmitter of volatility, while the Chinese green stock market acts as a net receiver. This indicates substantial benefits from employing risk hedging and portfolio diversification strategies.

The study underscores the importance of understanding the interconnected dynamics of stock markets for global investors and policymakers. By comprehending these relationships, investors can better manage risks and make informed decisions, while policymakers can develop strategies to support stable and resilient financial systems that foster sustainable investment.