Do geopolitical events transmit opportunity or threat to green markets? Decomposed measures of geopolitical risks

TLDR

The expansion of clean energy and technology sectors depends on stable financial markets, yet equity and bond markets face geopolitical risks. The study examines how green equity and bond markets react to newly decomposed geopolitical risk measures, such as acts, threats, and narrow/broad categories. The authors use cross‑quantilogram and QQ approaches to estimate conditional and unconditional volatility spillovers across short, medium, and long horizons. All geopolitical risk measures except geopolitical acts transmit positive shocks to green equity and bonds when moving from bearish to bullish states, whereas at bullish states green markets react negatively to the highest quantiles of all risk measures under long memory, and geopolitical acts negatively shock green assets at extreme quantiles, showing that geopolitical risks can both create opportunities and pose threats for green market investors.

Abstract

The growth of clean energies and technologies requires a sound financial market, while equity and bond markets are exposed to geopolitical risks. We investigate the response of green equity and green bonds to newly develop decomposed measures of geopolitical risks, including geopolitical acts, threats, and narrow and broad measures. To this end, we apply two robust methods; namely, the cross-quantilogram and quantile and quantile (QQ) approaches, to estimate the conditional and unconditional volatility spillovers considering short, medium, and long term. Surprisingly our empirical investigation demonstrates that all measures of geopolitical risk (except geopolitical acts) transmit positive shocks to the green investments (both equity and bonds) from bearish to bullish market states. At the bullish state, green markets respond negatively to the highest quantiles of all measures of geopolitical risks under a long memory. However, the geopolitical acts negatively shock the green bonds and green equity at some extreme quantiles. Our empirical findings are beneficial by transmitting opportunities and preventing risks for investment decision-making in the green markets, considering geopolitical risks.