“Diversifier, Hedge, or Safe Haven? An Empirical Investigation of the Co-Movement between Green Bonds and Other Financial Instruments.”

Abstract

This thesis presents a comprehensive analysis of the diversification benefits offered by green bonds through an examination of their co-movement with other financial instruments. The study covers a sample period spanning from February 5, 2016, to March 10, 2023. By employing a Markov-switching VAR model with time-varying transition probabilities, we effectively capture the regime-specific correlations between the green bond index and various financial indices. Our findings robustly challenge the prevailing notion that green bonds serve as hedges or safe havens for other financial markets. However, we do observe significant diversification benefits of green bonds in relation to the commodity, oil & gas, global stock, low-carbon, and carbon markets. These results underscore the potential of green bonds as an effective tool for portfolio diversification.