Oil price shocks, sustainability index, and green bond market spillovers and connectedness during bear and bull market conditions

Abstract

This study examines the spillover dynamics and interconnectedness amongst sustainability indices, green bond markets, and oil price shocks. Using data from June 2013 to February 2023, this study employs spillover index methodology to analyze the transmission of shocks and volatility. The findings reveal that there is time-varying connectedness between all variables, which evidences a significant boost during times of crisis and extreme circumstances. Furthermore, the North American and US sustainability indices, along with the SP500 Environmental, Social, and Governance (SP_ESG) index, act as significant transmitters of shocks and volatility to other markets under different market conditions. Conversely, the Asia-Pacific, emerging market, and European sustainability indices, along with the green bond index, have emerged as net volatility receivers. Additionally, the study highlights the role of oil risk shocks as a transmitter of volatility under normal and bullish market statuses, while becoming a receiver in the lower quantile. These results have noteworthy implications for understanding the interdependencies and risks within financial markets and provide insights for investors, policymakers, and market participants.