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Description
This paper examines the dynamic interactions between green bonds and major traditional financial markets using a multivariate vector autoregressive (VAR) framework. The key questions are whether green bond returns are mainly driven by conventional fixed income and macro financial factors, and whether green bonds act only as shock receivers or also as transmitters within the global system.
The analysis uses daily logarithmic returns over January 2019–December 2025 for six assets: the iShares Global Green Bond ETF (BGRN), Brent crude oil futures (OIL), the US dollar index (DXY), the S&P 500 index (SPX), the iShares 7–10 Year Treasury Bond ETF (IEF) and the iShares Global Clean Energy ETF (ICLN). Standard unit root and cointegration tests justify estimating a VAR model on returns, with lag length selected by information criteria. An economically motivated Cholesky ordering places global macro factors first (oil, dollar), followed by equities, Treasuries, clean energy and, finally, green bonds.
The empirical strategy combines Granger causality tests, impulse response functions with bootstrap confidence intervals and forecast error variance decomposition. This allows us to identify directions of causality, quantify the transmission of shocks and assess the relative contribution of each market to green bond volatility.
Results show that green bonds are strongly anchored in the conventional fixed income segment. Shocks to US Treasuries explain the bulk of BGRN’s forecast error variance at medium horizons, while the US dollar contributes a stable additional share, underlining the importance of global rate and currency conditions. In contrast, shocks from oil and clean energy equities have a smaller but non negligible impact, suggesting that the energy transition channel is present but secondary to the interest rate channel.
At the same time, green bonds are not purely passive. Granger tests and impulse responses indicate that innovations in BGRN can influence oil prices, US equity returns and, to a lesser extent, Treasuries, especially during the COVID 19 shock and the subsequent interest rate hiking cycle. Overall, the findings portray green bonds as primarily fixed income instruments that have nonetheless become an active node in the global financial network. This has implications for portfolio construction—limited diversification versus Treasuries but potential benefits against equity and energy risk—and for policymakers, who should monitor green bond markets as part of financial stability surveillance.
