Spillover effect between green bond and related financial markets: new evidence from machine learning based connectedness method

This research examines the challenges of issuing green bonds due to a lack of established benchmarks. We compare regional differences between the U.S. and the E.U., hypothesizing that issuers of green bonds stand to benefit from comparing them to conventional (black) bonds. As most investors prioritize net positive returns as opposed to intangible sustainability metrics, the existence of a “green premium”, defined as the opportunity to price green bonds differently, remains to be proven. To this end, we employ a time-varying parameter vector autoregression (TVP-VAR), first deriving dynamic variance–covariance matrices and then conducting variance decomposition analysis to gauge connectedness and spillover effects of various bond benchmarks. Implementing multivariate portfolio construction strategies, we investigate the hedging capabilities of green and black bonds. Our findings show that both green and black bonds contribute to portfolio diversification as a risk management strategy. The paper highlights the role played by green bonds in promoting financial stability.

<abstract> Green bonds have gained a significant share in the bond market. However, dynamic risk and its spillover to other conventional bond investments plays an important role in its understanding. In this paper, we analyze the volatility and correlation dynamics between conventional bond and green bond assets under both loose and stringent eligibility green-labeled criteria. We build dynamic conditional correlation (DCC) model specifications using alternative distributional assumptions. We also assess risk dynamics expressed by Value-at-Risk (VaR) and its corresponding loss function. We illustrate risk assessment in within and out-of-sample periods using conventional and green bond returns. The results show that there is significant spillover between conventional and green bond assets, triggering significant hedging strategies. However, these spillover effects are subjected to the type of green-labeled criteria. Finally, a risk assessment using VaR forecasting and its corresponding loss function estimation also demonstrates significant differentiation between green and conventional bonds. </abstract>

This paper aims at investigating the frequency connectedness and cross-quantile dependence between green bond and green equity markets. By decomposing green bond and green equity time series data into different frequency bands, we first identify how connectedness between green bond and green equity varies between the short-term, medium-term and long-term investment horizons. Next, we investigate the cross-quantile dependence between green bond and green equity to capture the connectedness between these markets across a wide range of market conditions. Our empirical results suggest that after controlling for movements in the general stock, energy and fixed-income markets, the dependence between green bond and green equity during normal market conditions is relatively small. On the other hand, green bond and green equity are more connected during extreme market movements, where spillovers from green equity to green bond tend to be larger than spillovers in the opposite direction. We also find that across all market conditions, the spillover effects between green bond and green equity are short-lived, as the degree of connectedness dissipates in the medium- and long-term investment horizons. Our results have important implications for environmentally conscious investors and policymakers.

Frequency connectedness and cross-quantile dependence between green bond and green equity markets

How does the issuance of green bonds impact stock price crash risk: An analysis utilizing the NCSKEW and DUVOL

Dependence and risk spillovers between green bonds and clean energy markets

Complex non-linear relationship between conventional and green bonds: Insights amidst COVID-19 and the RU–UA conflict

Dynamic connectedness, asymmetric risk spillovers, and hedging performance of China's green bonds

Asymmetric relationship between green bonds and Sukuk markets: The role of global risk factors

As the green bond market in China develops and its institutional structure improves, the green bond has emerged as a pivotal element within the broader framework of the green financial system. We focus on bond issuers in China’s A-shares from the years 2010 to 2021 and explore green bond issuance and the spillover effect of green technology innovation under the market attention perspective. Findings are that: (1) Green bond issuance can produce the spillover effect in the industry and significantly enhance peer enterprises’ green technology innovation. (2) From the viewpoint of market attention, analyst attention can significantly enhance the spillover effect of green bond issuance within the industry. The same is true for media attention and investor attention. (3) Further research shows that within the same industry, the spillover effect is more pronounced for state-owned enterprises, large-scale enterprises, and enterprises in regions with higher levels of green financial development. For the booming development of China’s green bond market and the sustainable development of enterprises, this paper provides theoretical and practical foundations.

PurposeCryptocurrencies have transformed the financial landscape and raised environmental concerns, particularly distinguishing between energy-intensive (dirty) cryptocurrencies and environmentally friendly (green) cryptocurrencies. This study investigates the role of energy-intensive and ecologically friendly cryptocurrencies in sustainable investments, exploring their potential as hedging tools amid market and geopolitical stresses.Design/methodology/approachEmploying a time-varying parameter vector auto-regression (TVP-VAR) connectedness approach, the research analyzes the interactions and spillover effects among clean and dirty cryptocurrencies, green bonds, and traditional financial assets. It also explores portfolio diversification strategies like minimum variance, correlation and connectedness portfolios, evaluating their risk minimization efficacy while incorporating green financial instruments. Empirical data on daily closing prices and financial indices are used to assess financial interconnectedness and evaluate portfolio diversification strategies.FindingsGreen bonds consistently provide strong hedging capabilities, while clean cryptocurrencies exhibit a more nuanced role influenced by market maturity and regulations. The results underscore the significance of promoting green finance to bolster investments in sustainable projects and enhance risk management strategies for investors. This research enriches the green finance literature by detailing the financial interconnectedness within the market and providing strategic insights for embedding sustainability in investment portfolios against a backdrop of global economic and geopolitical uncertainties.Research limitations/implicationsThe research highlights the importance of green finance in promoting sustainability and reducing environmental impact. It advocates for regulatory frameworks that support sustainable financial instruments, encouraging the development of financial products aligned with environmental goals and fostering a more sustainable economy.Practical implicationsThese research findings provide actionable guidance for investors and policymakers to develop diversified investment strategies incorporating green bonds and clean cryptocurrencies capable of balancing risks and returns. The study also urges policymakers to establish clear guidelines and incentives for green investments, improving transparency and effectiveness in green finance markets.Originality/valueThis study uses an innovative TVP-VAR connectedness approach to examine the interactions and spillover effects among clean and dirty cryptocurrencies, green bonds and traditional financial assets. It provides new insights into the roles of green bonds and clean cryptocurrencies as hedging tools in volatile markets, enhancing the understanding of financial interconnectedness and sustainable investment strategies.

Dynamic spillovers between uncertainties and green bond markets in the US, Europe, and China: Evidence from the quantile VAR framework

Impacts of COVID-19 outbreak, macroeconomic and financial stress factors on price spillovers among green bond

Dynamic spillovers between Shanghai crude oil futures and China's green markets: Evidence from quantile-on-quantile connectedness approach

This research paper analyzes the spillover effects of volatility between the U. S. green and non-green bond markets with international market volatility between 2018 and 2023. The empirical work used time and frequency domain methodology to analyze the connectivity in the short, medium, and long term. The results demonstrate that both green and non-green bond markets are recipients of volatility, although green bonds receive volatility to a lesser extent than traditional bonds. Despite this, traditional bonds become recipients of volatility during periods such as the COVID-19 pandemic, while green bonds experience volatility reception during the Russia-Ukraine conflict period.