Time-Varying Co-Movements Between Green Bonds, CO₂ Emissions, the Investor Sentiment, and Financial Stress

Green bonds are attracting growing interest as sustainable financial instruments that support the transition to a low-carbon economy by financing environmentally responsible projects. Understanding how these instruments interact with CO₂ emissions and investor sentiment is essential to assess their stability and long-term potential. The aim of this study is to explore the dynamic relationships between green bonds and a selection of financial and environmental variables, including US conventional bonds, the WilderHill Clean Energy equity index, and CO₂ emission allowances. Additionally, the study evaluates the impact of investor sentiment and financial stress on green bond performance. The methods used include a quantile regression model, which assesses whether the Standard and Poor’s (S&P) Green Bond Index can be explained by the aforementioned variables — namely CO₂ emissions, clean energy stocks, investor sentiment (proxied by Google Trends), and financial stress [measured by the Office of Financial Research (OFR) Index]. The analysis covers the period from July 6, 2011, to September 15, 2023. To account for time-varying relationships, a Bayesian time-varying vector autoregressive (BTC–VAR) model is also applied. The results show a negative unidirectional effect from CO₂ emissions to the green bond index and a positive unidirectional effect from the clean energy index. However, green bonds appear weakly correlated with the other considered assets. Investor sentiment does not show a significant influence, while financial stress plays a more important role, indicating that green bonds may be perceived as safer assets during periods of uncertainty. The key conclusion is that green bonds exhibit selective sensitivity to specific financial and environmental factors. Their relative stability during episodes of financial stress reinforces their position as both sustainable and resilient investment tools. These findings provide useful insights for investors, policymakers, and researchers interested in the evolving dynamics of green finance.