Go green or stay black: Bond market dynamics in Asia

Abstract

This paper presents a picture of the risk spillover relationship of green & black bonds in Asia. In normal situations and the long-term horizon, green bonds and black bonds have similar impacts with each other, with a slight predominance of black bonds. Based on the dynamic connectedness results, we classify the sample period into three stages. The first stage is a period with equal role of green and black bonds from Jan 2018 to Feb 2020, which is regarded as a normal situation of the bond market. The second stage is an unbalanced period with a pivotal point of the Covid-19, demonstrating an increased gap of the connectedness exported by green and black bonds. The third stage is the recovery period after Oct 2020, where we see a correction with the role of green and black bonds recovering gradually to the equal status. In addition, the green-to-black connectedness in longer term witnesses faster and stronger recovery, which suggests that the long-term influences of green bonds are relatively stable than the short-term influences. Moreover, the paper tests the effects of the same issuer. Our analysis shows that there are strong connections among bonds in the Philippines that are issued by the same institution. However, the same issuer is not a sufficient condition for a strong connectedness. Furthermore, our analysis in China Mainland, reveals that the green policy will firstly cause the change of green bonds price and then spillover the impact to conventional markets. Through the study of the drivers of connectedness dynamics in four directions (green-to-green, black-to-black, green-to-black, black-to-green), we present empirical findings that are crucial for investors and policymakers in risk management, hedging strategy, and green investment acceleration.