Volatility dynamics between green and sovereign bonds in Europe, Sustainable and Responsible Management, The Journal of Sustainable Business, Vol. 3, No. 2 -2022, ISSN 2724-4466
Author(s)
Ortolano, Alessandra
Angelini, Eliana
Date Issued
2022
Type
article
Abstract
The paper is a study on the dynamical conditional correlations between the European markets of green and sovereign bonds before and during the pandemic. To this purpose, we apply the Dynamic Conditional Correlation Generalized AutoRegressive Conditional Heteroskedasticity (DCC-GARCH) model to the Bloomberg MSCI Euro Green Bond Index and to S&P Eurozone Sovereign Bond Index. After calculating the univariate GARCH for each series, the model allows us to observe the dynamic interrelations over the short and long run for both periods of analysis. Our main results demonstrate that if the long term parameter is significant each time, in the short run the two indices are dynamically conditionally correlated only during the pandemic. We deem this issue interesting in terms of portfolio construction as it testifies that the two market segments can be allocated for diversification purposes in the short run during “normal” times, while this property vanishes in periods of crisis. All in all green bonds seem to present analogous behaviors with conventional bonds so they cannot be regarded as a different asset class, but they are fundamentally substitutes or supplements of more traditional fixed income securities. Notwithstanding they allow investors to integrate climate risk in their portfolios showing a risk-return profile similar to that of Treasury bonds. The added value of our research is given
by the focus on the volatility connections between the green and sovereign segments of the European fixed income: to the best of our knowledge there is lacking research on this topic.