Extreme Risk Dependence between Green Bonds and Financial Markets

Green bonds and financial markets underline severe extreme dependence due to uncertain economic and financial circumstances. Time-varying optimal copula (TVOC) is a unique methodology that provides useful copula information under different time series, underscoring several regimes following distressing episodes. The current study endeavours to study the extreme risk dependence between green bonds and financial markets for the period encompassing January 2012 to September 2021. We employed the dual approaches of TVOC and extreme risk spillover analysis of dynamic conditional Value-at-Risk (CoVaR). We report significant symmetric (asymmetric) tail-dependent copulas in the upper (lower) tails characterizing independent regimes, particularly economically fragile ones. The best-fitting copulas are related to multiple categories given different time-varying dynamics. Green bonds offer sufficient diversification, safe-haven, and hedging opportunities during stable and distressing times to financial markets. The extreme risk spillovers also revealed that COVID-19 transformed the spillovers between green bonds and financial markets except for Bitcoin. We proposed insightful implications for policymakers, governments, investors, and portfolio managers to relish these findings while designing their investment avenues