DYNAMIC RETURN SPILLOVERS BETWEEN SUPRANATIONAL AND REGIONAL GREEN BOND MARKETS

Abstract

Green bonds, as a new and innovative financial tool, interest investors by allowing them to achieve twofold aims. Firstly, investing in green bond market allows to diversify portfolio and increase its efficiency. At the same time, investing in green bonds is a sustainable investment option ensuring a positive impact on the environment. Numerous studies point to the connectedness effects between the returns of green bonds and conventional or green asset markets, but little attention has been paid to the assessment of the spillover effects between the green bond markets themselves. Our study seeks to address this gap by focusing on the dynamic return spillover between supranational green bond market and the biggest regional green bond markets in Europe, the US, and Asia. Using daily data covering the period of October 13, 2021, to January 31, 2023, we apply the vector autoregression model and use spillover method of Diebold and Yilmaz (2012) to determine the time-varying level of these markets’ connectedness. We have found that the average level of return spillover is estimated at 42.46 percent. A clear distinction would be that supranational, the US, and the EU green bond markets are the net transmitters of spillover, while Asia’s green bond market is the net receiver. Also, we have found that the supranational green bond market affects the region’s green bond indices at different levels. Our finding provides systematic insights for international investors and policymakers on the possibilities of financial stability, risk assessment, and portfolio allocation in different green bond markets.