Volatility Spillovers and Hedging Effectiveness of Green Bonds: A Cross-Regional Analysis

This research investigates the correlation transfer between green and conventional bonds across different geographical regions, highlighting the diverse approaches to climate policy in Europe, the US, and China. By employing a Time-Varying Parameter Vector Autoregressive (TVP-VAR) model, we analyze the phenomenon of risk contagion and cross-national interconnections in the bond market. Given the period of significant economic turbulence, our study spans from May 1, 2019, to December 31, 2023. Additionally, we apply multivariate portfolio techniques to evaluate the effectiveness of hedging strategies, and our findings show that green bonds have a greater tendency to transmit volatility than conventional bonds, underscoring the importance of adopting a cross-regional perspective to understand these dynamics. For investors, strategic allocation of green bonds, such as in a Minimum Variance Portfolio, may reduce portfolio volatility and serve as a hedge against market risk. Policymakers should address the vulnerabilities of green finance instruments and the interconnectedness of the global market when designing regulatory frameworks and risk mitigation strategies.