Analysis reveals that portfolio allocation optimizes green bonds' risk mitigation, suggesting spillovers impact investment strategy.
This study investigates the dynamic connectedness and optimal portfolio allocation among Green Bonds, Green Stocks, Brown Stocks, Technology Stocks, and Carbon Assets over the period 01 January 2014 to 31 August 2025. Employing the TVP-VAR model, alongside the DCC-GARCH framework, the analysis captures evolving spillovers, dynamic hedging relationships, and portfolio interdependencies. Robustness is ensured through the ADCC-GARCH specification, which confirms that the results are not compromised by the presence of asymmetric volatility effects. Our findings reveal that market interdependence is profoundly dynamic and event-dependent, with systemic connectedness surging during periods of global turmoil such as COVID-19 and the Russia-Ukraine war. Green, Brown, and Technology Stocks emerge as primary net transmitters of risk, whereas Carbon Assets and Green Bonds act as volatility absorbers, enhancing portfolio stability. Portfolio optimization shows Carbon Assets receive higher optimal weights, confirming their value as cost-effective diversifiers, whereas Green Bonds, despite lower allocations, contribute to risk mitigation due to low volatility and defensive profile. Furthermore, we find that equity pairs exhibit the most variable and elevated hedging ratios, signaling significant co-movement and higher hedging costs during turbulent periods. Overall, the findings yield valuable, policy-relevant insights for regulators and investors seeking to strengthen financial stability amid the ongoing energy transition.
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Agarwal et al. (2025) studied this question.
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