Green bonds’ connectedness with hedging and conditional diversification performance

Abstract

Investments in green assets are becoming increasingly significant, and they present a new asset class for investors. Consequently, the resulting connectedness among these green assets has implications for investments. Our work therefore studies 12 international green bonds markets using data from February 12, 2008 to May 21, 2021. We looked for spillover across these markets and found low values for it, suggesting there are avenues for portfolio diversification, except for with the Japanese and Hong Kong markets, which receive significant spillover from the US market. Relative to the US market, there are hedging opportunities when greater weights are assigned to the UK, Australian, Canadian, Japanese, Norwegian, and New Zealand markets for green bonds. We also highlight that these diversification benefits are conditional on the expected shortfall and the creation of an equally weighted portfolio when combining US green bonds with other green bonds.