Quantifying the hedge and diversification potential of green markets against climate risk

This study explores extreme dependence structure between climate risk and green markets, focusing on their diversification, hedging, and safe-haven potential. We employ a time varying optimal copula and a conditional diversification benefit between green markets and climate risk. The results exhibit a symmetric, asymmetric and tail dependence structure between climate risk and green markets. The dependence structure varies with a pair of green markets/climate risks and time periods include economic crises, climate agreement events, and climatic disasters. The green markets demonstrate the simultaneous presence of diversification, hedging, and safe-haven characteristics in response to climate change and physical risk. • We analyze the hedge and diversification potential of green markets against climate risks. • We use time-varying optimal copula and conditional diversification benefit methods. • We find that green markets exhibit safe-haven, hedging, and diversification attributes. • Our results highlight time-varying dependence during crises, climate events, and disasters. • We offer actionable insights for investors and policymakers on green market resilience.