Dynamics of Green and Conventional Bonds: Hedging Effectiveness and Sustainability Implication

Rihab Belguith ()
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Rihab Belguith: Probability and Statistics Laboratory (LR), Faculty of Business and Economic Sciences, University of Sfax, Sfax 3029, Tunisia

IJFS, 2025, vol. 13, issue 2, 1-25

Abstract: 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.

Keywords: dynamic connectedness; bond markets; shock transmission; portfolio optimization; sustainable finance; U.S. and E.U. bonds (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2025
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