Dynamic connectedness of green bond with financial markets of European countries under OECD economies

Abstract

This paper examines the dynamic connectedness between green bonds and OECD financial markets of European countries. The study is conducted on daily price of green bonds and selected European stock markets from January 27, 2015, to August 4, 2021. Top ten European countries namely Luxembourg, Switzerland, Norway, Denmark, Germany, Netherlands, Iceland, Austria, Sweden, and Belgium are included within the OECD economies. The study uses Diebold and Yilmaz and Barunik & Krehlic tests to examine the connectedness between the economies and green bonds in short, medium, and long term. Result exhibits volatility across all frequency cycles. Brussel Stock Exchange and Euronext Amsterdam are identified as high-risk markets in the OECD European market. Evidence emerging from this study advocate the inclusion of green bonds in these financial markets for shorter time periods only. Results from this study are expected to have practical implications for portfolio managers, investors, and market regulators, suggesting incorporation of green bonds in investor portfolio for efficient diversification of risk.

The impacts of global economic policy uncertainty on green bond returns: A systematic literature review

“…These indexes offer a robust quantitative framework for researchers to analyze the extent to which changes in one market can affect others [13] , providing critical insights into the interdependencies within the global financial system. Some notable studies that utilized these indexes include [28] , [35] , [16] , [25] , [55] …”

“…Interestingly, crude oil demonstrated a pronounced association with green bonds, particularly over longer time horizons. Yadav et al [55] also employed Diebold and Yilmaz tests, along with Barunik and Krehlic tests, to analyze the interconnections between green bonds and the economies of the top ten European countries. These countries include Austria, Sweden, Germany, Luxembourg, Norway, Denmark, Switzerland, Netherlands, Iceland, and Belgium, all of which are part of the OECD.…”

An investigation on dynamic connectedness of commodity market with financial market during the Russia–Ukraine invasion

“…The terms "alpha 1" and "beta 1" denote ARCH and GARCH, respectively. Alpha indicates whether there is variance in the short run or not, depending on past disruptions whereas beta is a measure of volatility persistence that quantifies the impact of shocks on the market's long-term conditional correlation (Yadav et al, 2022(Yadav et al, , 2023. To confirm volatility persistence the alpha1 and beta 1 values need to be significant and positive at a 5% significance level.…”

Uncovering time and frequency co-movement among green bonds, energy commodities and stock market

“…Green bonds have gained wide acceptance over the past decade and emerged as a credible financial instrument for fostering an economy with low carbon footprints (Reboredo and Ugolini, 2020). The differentiating fact about a green bond is that the collected proceeds must be used for initiatives involving clean water management, energy efficiency, green architecture and sustainable sources (Reboredo, 2018; Flammer, 2020; Nguyen et al , 2021; Yadav et al , 2023). Apart from being an environment-friendly financial instrument, it builds a positive impact on the issuer’s equity performance (Flammer, 2020) and outperforms returns relative to traditional corporate bonds (Lautsi, 2019).…”