Dependence and hedging between green bonds and clean energy sub-markets in China: Insights from time–frequency wavelet approaches

Abstract

This paper examines the time–frequency dependence between green bonds and clean energy subsector stocks in China, as well as the diversification strategies of relevant investors. Furthermore, this paper considers the impact of the pandemic on diversification strategies. Based on the wavelet coherence and wavelet phase difference analysis, the results indicate that the dependence among green bonds and clean energy varies significantly across scales and clean energy stock market sub-sectors. Besides, various clean energy subsector stocks lead green bonds in the long term. Then, this paper applies the wavelet-transformed data to estimate hedge ratios and hedge effectiveness at different wavelet scales. The clean energy categories and the investment horizon would affect the cost and hedging effectiveness when hedging clean energy stocks with green bonds, and the hedging effectiveness rises with the increase of the scales. Furthermore, the hedging costs vary significantly with various subsector stocks at all investment horizons in the aftermath of the pandemic. These results contribute to environmentally friendly investors and policymakers by considering the clean energy sub-categories at different frequencies.