How green screening influences risk transmission among stock-bond indices: Insight into the dependence structure

Green characteristics are pivotal to risk transmission. We use environmental, social and governance (ESG) monetized accounting to measure green screening of stock-bond indices, and decompose risk transmission into comovement, contagion and hedging effects via a patched dependence structure model. Mechanisms through which green screening impacts three types of risk transmission effects are elucidated. Results indicate that high level of green screening is associated with significantly reduced comovement and contagion effects while hedging effects. Market sentiment factors such as interest rates, economic policy uncertainty and consumer confidence are identified as crucial channels. These results are further tested to be robust.