Return Connectedness Among Selected Asset Classes and Green Bonds

The present chapter delves into the role of green bonds within a non-conventional asset class investment portfolio. Despite the increasing evidence about the role of Green Bond in asset allocation, there is limited evidence on the interaction of this asset class together with non-conventional asset class indexes for the US Market, such as ABS bonds, High-Yield bond (rating CCC), Municipal Green Bonds, Nasdaq Green Bonds, and MSCI US Stock Market index. The analysis is conducted using a time-varying parameter vector auto-regression (TVP-VAR) model to examine daily data from January 1, 2015, to October 20, 2023. This setting allows for studying the connectedness between asset classes conditional on several market situations. Various dynamic weighting schemes are employed to construct bond portfolios, including a minimum connectedness portfolio aiming to minimize the connectedness between variables. Our findings are that Green Bonds act as a net transmitter only in the last part of the sample. The weights of Green Bonds in the portfolio range from 6 to 14 percent. Green Bonds do not show any special hedging role within the context of other asset classes. Contrary to common wisdom, leaving out Green Bonds allows for building portfolios with higher Sharpe Ratios. The evidence here collected casts some doubts about the hedging properties of Green Bonds when non-standard asset classes are considered as ingredients for asset allocation.