Sustainable Finance Instruments' Risk - Green Bond Market Analysis

Sustainable finance opportunities for retail investors such as green bonds are the example of instruments that are dedicated to transition of economy towards more sustainable model and are serving as a source of financing for large-scale investments. The paper aims at verification of volatility behaviour of green bond market and relationship of green bond market volatility and conventional bond market volatility. Our study sheds additional light to previous findings and extends the perspective, going beyond analysis of behaviour of S&P green bond index. Our study was conducted on a wider range of available green bond indices in order to draw more general conclusions. We studied daily rates of return in the period of 2014 - 2018 of the S&P Green Bond Index, Bloomberg Barclays MSCI Global Green Bond Index, ICE BofAM Green Bond Index, Solactive Green Bonds Index. Using multivariate GARCH framework we were able to verify and test volatility patterns and assess how the volatility of in the green bond market transmits to broader conventional bond market. Results of our study confirm that all green bond indices, experience large volatility clustering. We also found out that shocks in the overall conventional bond markets tend not to be echoed in the green bond market. Findings of this paper are significant from the perspective of providing informative insights for the investors risk and return characteristics. They also contribute to the development of sustainable finance and risk analysis of sustainable finance instruments.