Connectedness between green bonds and financial instability index A TVP-VAR-Connectedness Approach
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Abstract
The increasing interconnectedness between conventional financial markets and sustainable financial assets has generated a complex network of uncertainty and systemic risk transmission across global markets. This study utilizes the Time-Varying Parameter Vector Autoregression (TVP-VAR)-Connectedness approach to examine the dynamic spillovers between CIMAX-based financial instability indicators and green bond market risks. The analysis includes major financial market segments, namely equity, energy, commodity, and bond markets, together with three green bond–related indices: the S&P U.S. Municipal Green Bond Index, the S&P Green Bond Index, and the S&P Global Clean Energy Select Index. By integrating the TVP-VAR-Connectedness framework with CIMAX-based risk measures, this research captures the time-varying nature and interconnected structure of systemic risk transmission. The main findings reveal significant and highly dynamic spillover effects, particularly during major global crises such as the COV ID-19 pandemic and the Russia–Ukraine conflict. The results further indicate that equity, energy, and commodity markets dominate the transmission of systemic risk, whereas green bond markets mainly act as net receivers of shocks. Nevertheless, green financial assets occasionally contribute to risk propagation, reflecting their growing integration within the global financial system.
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