Impact of green bonds on traditional equity markets

This study examines the broader U.S. green bond market, with focus on its association with the U.S traditional equity market from 2016–2021. For this purpose, we use the S&P Green Bond Index, the S&P U.S. Aggregate Bond Index, and the S&P 500 to build the connection between the markets based on both univariate generalized autoregressive conditional heteroskedasticity (GARCH) and multivariate vector autoregression (VAR) models. Our empirical results show that the patterns of returns and the volatility behavior of green bonds included significant changes over the years of study. The findings highlight the importance of the emergence and evolution of the promising green bonds market, thus providing useful policy implications for portfolio and risk management as well as asset pricing. This study contributes to a deeper understanding of the impact of green bonds on equity markets. • The broader US green bond (GB) market is examined for the 2016–2021 period. • Both univariate GARCH and multivariate VAR models are applied. • The returns & volatility behavior of GBs witnessed changes over the years. • The importance of the emergence & evolution of the promising GB market is evident.