New Frontiers in Sustainable Finance: Asymmetric Risk Connectedness of Green Bonds with Global Financial Markets

Abstract

Purpose: This paper explores the asymmetric and state-dependent dependence relationship of the S&P Green Bond Index with six international markets and assesses whether such dependence patterns are correlated with the risk-reduction benefit associated with holding a green bond portfolio.Design/Methodology: The analysis is based on 2,856 aligned daily log returns of the S&P Green Bond Index, S&P 500, DAX, Shanghai Composite, S&P GSCI, S&P Bitcoin Index, and S&P Global Clean Energy Index from 2 January 2014 to 30 April 2026. Quantile-on-Quantile Regression (QQR) is computed. An economic significance is measured using long-only two-asset minimum variance portfolios.Findings: The findings show that there is significant asset and state-specific dependence. The minimum-variance portfolios invest relatively heavily in green bonds due to the significantly reduced unconditional volatility and yield significant in-sample variance reductions, but do not show universal hedging or safe-haven performance.Practical Implications: Green bonds should be considered as a state contingent, low volatility diversifier and not a universally defensive or safe haven asset. Market-state stress testing, asset-specific dependence and currency exposure are to be taken into consideration by investors and portfolio managers as part of their allocation decision.Originality: The present study is an incremental cross-market extension of the existing body of work, and then connecting asymmetric dependence estimates to formal portfolio evidence.