Quantile Dependence and Portfolio Diversification between Green Bonds and International Financial Markets: Evidence from Quantile-on-Quantile Regression

Abstract

In this study, the green bond market is investigated with respect to its connectedness with certain international financial markets, employing the Quantile-on-Quantile Regression (QQR) technique that is used to measure this connectedness. Green bonds have emerged as a significant financial tool for financing low-carbon growth and building environmentally responsible investment portfolios, especially in the context of the increasing climate risk and the rising requirement for sustainable financing. But their diversification, hedging or safe-haven properties will depend on their interactions with other financial markets in various market conditions. Daily log-return data for the S&P Green Bond Index and some global markets, namely the S&P 500, S&P GSCI Commodity Index, S&P Global Clean Energy Index, Bitcoin, and the Shanghai index are analyzed. The QQR method allows the analysis to reflect the nonlinear and asymmetric relationships throughout the bearish, normal and bullish quantiles. The results show that green bond connectedness is market specific and condition dependent. The connectedness of green bonds with Bitcoin is weak and unstable, indicating a potential for diversification, while the connectedness is strong and positive with clean energy market, which indicates their similar sustainable finance attributes. The correlation of the S&P 500 and Shanghai market grows stronger in bull markets, while the connectedness of the commodity market is mixed. Overall, the results show that green bonds are not completely immune from international financial market fluctuations and the advantages of green bond portfolios depend on the state of the market. The study helps advance the body of work on sustainable finance and provides empirical insights using quantiles to understand the connectedness of green bonds, which can be applied by investors, portfolio managers, and policymakers to advance climate-resilient and sustainable financial systems.This study goes beyond the previous research, which has mainly examined linear relationship, and explores the interaction between green bonds and international financial markets in terms of time-varying and quantile-dependency, offering new insights in green portfolio construction, hedging effectiveness, and sustainable asset allocation.