When ‘green’ challenges ‘prime’: empirical evidence from government bond markets

ABSTRACT

We examined co-movement between green bonds and triple-A government bonds during December 2008–November 2019. We determined that two markets followed the heavy tail dependence using Student’s t-copulas. Using transfer entropy, further evidence was obtained for the causal relationship between the two markets, which was described by three categories such as ‘no effect,’ ‘mono-direction,' and ‘bi-direction'; this relationship indicated the sender and the receiver of return shocks on these markets. Our results highlight the presence of contagion risk between green bonds and prime government bonds, which has practical implications for risk management.

KEYWORDS:

• Copulas
• contagion risk
• green bonds
• government bonds
• transfer entropy

JEL CLASSIFICATIONS:

• C58
• G10
• G12
• Q50

Acknowledgements

I am grateful to Mei Wang for helpful comments and discussions. I thank Prof. Olaf Weber and three anonymous referees for their constructive and helpful feedback on and suggestions for this manuscript. All remaining errors are my own.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 United States dollar (USD), Euro (EUR), Pound sterling (GBP), Japanese yen (JPY), Australian dollar (AUD), New Zealand dollar (NZD), Canadian dollar (CAD), Swiss franc (CHF), Norwegian krone (NOK), Swedish krona (SEK).

2 Except from Lichtenstein Government Bond due to the debt-free country; therefore, our sample has 10 countries rated ‘AAA’ including Australia, Canada, Denmark, Germany, Luxembourg, Netherlands, Norway, Singapore, Sweden, Switzerland.

3 Denmark becomes the first developed country in 2019 dip below zero. However, it also shows that Denmark is attractive investor destination. ‘Sad’ milestone as all Danish government bond yields dip below zero.

4 Please refer to report of ‘In Canada, Green Bonds Are Taking Root’ by S&P Global Ratings.

5 The transmitted value is 2.73, which is lower than Corporate bond and the dynamics of the USD currency market.

6 We thank an anonymous referee for pointing out the insightful suggestion.

Additional information

Funding

This work is fully funded by the University of Economics Ho Chi Minh City (Vietnam).