Unveiling the relationship between oil and green bonds: Spillover dynamics and implications

Abstract

This study investigates the spillover dynamics and directionality between oil prices (OP) and green bonds (GB) using a bivariate Generalized Autoregressive Conditional Heteroskedasticity (GARCH) framework. The research aims to contribute to the understanding of the complex relationship between OP and GB and provide valuable policy insights to stakeholders. The results confirm the presence of significant spillovers between the two markets, indicating a transmission of risk and contagion. While the unconditional correlation between the returns of OP and GB is close to zero, bivariate asymmetric GARCH-BEKK estimations reveal a clear connection between the two markets. Past return shocks in the GB market are found to mitigate subsequent volatility in the OP, suggesting a level of substitution between the two markets. Volatility spillovers between the two markets are also evident, although their signs vary. This study contributes to the literature by filling a research gap and offering insights into the spillover dynamics and directionality between OP and GB. The results highlight the interconnectedness and transmission of risk between the two markets, suggesting the need to consider their relationship for investment decisions. Policymakers, investors, and other stakeholders can benefit from the insights provided in this research for effective risk management and investment strategies.