From climate risk to the returns and volatility of energy assets and green bonds: A predictability analysis under various conditions

• DOI: 10.1016/j.techfore.2023.122682
• Publication Date: 2023-06-15T21:33:00Z
• Authors: Elie Bouri; Lavinia Rognone; Amin Sokhanvar; Zhenkun Wang
• Keywords: EUROPE; PREDICTION; physical and transition risk; Physical and transition risk; PHYSICAL AND TRANSITION RISK; carbon emission allowances; 7. Clean energy; green and brown energy; CARBON EMISSION ALLOWANCES; CARBON; ENERGY; EMISSION ALLOWANCES; European markets; CARBON EMISSION ALLOWANCE; EUROPEAN MARKETS; CLIMATE EFFECT; GREEN AND BROWN ENERGY; Quantile dependency and predictabilityCross-quantilogramPhysical and transition riskGreen and brown energyCarbon emission allowancesGreen bondsEuropean markets; POWER MARKETS; RISK ASSESSMENT; GREEN BONDS; CARBON EMISSION; INVESTMENTS; CARBON EMISSIONS; GREEN BOND; cross-quantilogram; Nanjing University of Finance and Economics; green bonds; ENERGY MARKET; FINANCIAL MARKET; 13. Climate action; CROSS-QUANTILOGRAM; Carbon emission allowances; Cross-quantilogram; QUANTILE DEPENDENCY AND PREDICTABILITY; ENVIRONMENTAL ECONOMICS

The importance of climate risk as a source of systemic risk for financial markets and the decisions of investors, portfolio managers, and regulators is growing. We examine the directional predictability from two climate risk measures, transition risk and physical risk, to the returns and volatility of European brown and green energy stocks, European carbon emission allowances, and global green bonds. Using daily data, we apply a cross-quantilogram approach in a time-varying setting to measure potential differences in the predictability across quantiles and over various crisis periods. The return predictability results are more pronounced for transition risk than physical risk, especially for brown energy stocks and carbon emission allowances, and they generally vary across periods and markets conditions. The predictability of volatility is also significant at specific time periods and volatility states, especially from transition risk, and the sign of the predictability is positive for brown energy and carbon emission allowances whereas it is negative for green bonds. We show that a lower-than-expected level of discussion about the transition process leads to a heightened volatility of brown energy markets. These findings have important implications regarding climate risks assessment on return and volatility predictability and climate risk and portfolio decarbonization under COP26.