Dynamics of the return and volatility connectedness among green finance markets during the COVID-19 pandemic

Abstract

This paper examines the return and volatility connectedness among green finance markets including the green bonds, clean energy and socially responsible stocks, especially focusing on the connectedness changes induced by the COVID-19 pandemic. Specially, by employing the TVP-VAR extended joint connectedness approach, five representative time series, i.e., S&P Green Bond index (GBI), S&P Global Clean Energy index (GCEI), S&P Global 1200 ESG index (ESGI), S&P Global 1200 Carbon Efficient index (CEI) and S&P Global 1200 Fossil Fuel Free index (FFFI), are used to measure the connectedness among the markets over the sample period spanning from 1 January 2014 to 31 December 2021. The empirical results show that GBI is the main net receiver of return spillovers, followed by ESGI, CEI and FFFI, whereas GCEI is the main net transmitter of return spillovers during the full sample period. The dynamic total connectedness of five indices' returns is strongly fluctuating and especially exhibits a significant spike after the outbreak of COVID-19 pandemic. Interestingly, the findings of volatility connectedness indicate that ESGI, CEI, and FFFI are net transmitters of volatility spillovers during the full, pre-COVID-19 and post-COVID-19 periods. In addition, the network connectedness analysis highlights the role of GCEI in facilitating the transmission of financial contagion during the full and pre-COVID-19 periods, while that during the post-COVID-19 period shows that GBI receives more spillovers from others, indicating that the connections of the five indices tend to be stronger during market downturn periods caused by extreme events. Our results provide implications for investors and policymakers.