Assessing green bond risk: an empirical investigation

Aikaterini (Katerina) Tsoukala; Georgios Tsiotas; Aikaterini (Katerina) Tsoukala; Georgios Tsiotas

doi:10.3934/GF.2021012

Green Finance

2021, Volume 3, Issue 2: 222-252. doi: 10.3934/GF.2021012

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Research article

Assessing green bond risk: an empirical investigation

Aikaterini (Katerina) Tsoukala ¹,
Georgios Tsiotas ^{2
,
,}

1.
Green Party of Canada, 116 Albert Street Suite 812 Ottawa, Ontario, K1P 5G3, Canada
2.
Department of Economics, University of Crete, Panepistimioupolis, Rethymnon 74100, Greece

Received: 21 April 2021 Accepted: 24 June 2021 Published: 28 June 2021
JEL Codes: G15, F36

Green bonds have gained a significant share in the bond market. However, dynamic risk and its spillover to other conventional bond investments plays an important role in its understanding. In this paper, we analyze the volatility and correlation dynamics between conventional bond and green bond assets under both loose and stringent eligibility green-labeled criteria. We build dynamic conditional correlation (DCC) model specifications using alternative distributional assumptions. We also assess risk dynamics expressed by Value-at-Risk (VaR) and its corresponding loss function. We illustrate risk assessment in within and out-of-sample periods using conventional and green bond returns. The results show that there is significant spillover between conventional and green bond assets, triggering significant hedging strategies. However, these spillover effects are subjected to the type of green-labeled criteria. Finally, a risk assessment using VaR forecasting and its corresponding loss function estimation also demonstrates significant differentiation between green and conventional bonds.
- conditional volatility,
- conditional correlation,
- value-at-risk,
- DCC models,
- forecasting,
- green bonds
Citation: Aikaterini (Katerina) Tsoukala, Georgios Tsiotas. Assessing green bond risk: an empirical investigation[J]. Green Finance, 2021, 3(2): 222-252. doi: 10.3934/GF.2021012

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Abstract

Green bonds have gained a significant share in the bond market. However, dynamic risk and its spillover to other conventional bond investments plays an important role in its understanding. In this paper, we analyze the volatility and correlation dynamics between conventional bond and green bond assets under both loose and stringent eligibility green-labeled criteria. We build dynamic conditional correlation (DCC) model specifications using alternative distributional assumptions. We also assess risk dynamics expressed by Value-at-Risk (VaR) and its corresponding loss function. We illustrate risk assessment in within and out-of-sample periods using conventional and green bond returns. The results show that there is significant spillover between conventional and green bond assets, triggering significant hedging strategies. However, these spillover effects are subjected to the type of green-labeled criteria. Finally, a risk assessment using VaR forecasting and its corresponding loss function estimation also demonstrates significant differentiation between green and conventional bonds.

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