Green Sukuk or Green Bonds: A Comparative Study of Diversification and Hedging Prospects

Abstract

This study employs the wavelet coherence and the spillover index methodologies to compare time-varying relationship between green sukuk (GSI) and green bonds (SPGB) with S&P 500, FTSE 100, KBW NASDAQ Financial Technology Index and Bitcoin between October 2019, and December 2022. While the predominant tonality of the coherence of GSI and SPGB was weak, GSI and SPGB failed to offset spillover during the covid-19 pandemic. Overall, GSI exhibited superior diversification and hedging performance. The spillover index results unveiled the influence of bearish market conditions on the intensity of market connectedness, prompting temporal transmission of risks between markets which can last up to eight days following the emergence of a shock. GSI slightly outperformed SPGB in portfolio diversification amid low total market connectedness, less net spillover, and less net-pairwise spillover as revealed by the findings of the spillover index. A combination of GSI or SPGB with S&P 500, FTSE 100, KBW NASDAQ Financial Technology Index, and Bitcoin under the same investment portfolio is likely to offer long-term investors diversification and hedging opportunities. Keywords: green sukuk, green bond, co-movement, spillover, wavelet, risk management.