Dynamic Connectedness and Hedging Effectiveness Between Green Bonds, ESG Indices, and Traditional Assets

Abstract

This study highlights the significance of incorporating environmental, social, and governance (ESG) criteria within investment strategies to strengthen risk management in volatile markets. Employing time-varying parameter vector autoregressions and dynamic conditional correlation generalized autoregressive conditional heteroskedasticity models, it explores dynamic links between green bonds, ESG indices, traditional equities, and government securities. The overall findings reveal significant volatility spillovers, with green bonds as major recipients and the S&P 500 and S&P 500 ESG indices as net transmitters across market conditions. Practical hedging insights show the effectiveness of ESG assets for portfolio stability during turbulence, offering valuable guidance for investors striving to harmonize profitability with sustainability goals while strengthening portfolio resilience and long-term stability.