Assessing green bond risk: an empirical investigation

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.