Vulnerability of eco-friendly assets to return shocks from climate change and carbon credit indices

Proposing a quantile-on-quantile extended joint connectedness (QQ-EJC) framework that combines the quantile-on-quantile connectivity (QQC) and extended-joint connectedness (EJC) models, we examine the vulnerability of eco-friendly assets to return shocks in climate change and carbon credit indices across various quantiles and evaluate the multivariate portfolio implications. The results show the following: Compared to the carbon credit index, the climate change index is more strongly interconnected with eco-friendly assets, particularly clean energy and renewable technology stocks. Connectedness is the strongest under extreme negative shocks. Carbon and climate change indices are dominant transmitters of extreme shocks to eco-friendly assets. The pandemic affected the evolution of total and net quantile connectivity measures, with carbon/climate indices recoupling with eco-friendly assets over time. Portfolio weights and hedging effectiveness under a minimum connectedness approach suggest that carbon credits and clean energy are the most effective assets, unlike green bonds that offer no added-value to a portfolio.