The driving forces of green bond market volatility and the response of the market to the COVID-19 pandemic

The extant literature on green finance is mainly about its contribution to financing the transition to a low-carbon economy and the benefits it has brought to financial market participants’ portfolio diversification. As one of the most profound and important segments of green financial and fixed-income markets, the green bond market is at the centre of recent studies on green finance. This current research analysed the risky side of the green financial market by examining the response of the green bond market to extreme negative shocks, followed by a deep and comprehensive examination of the driving forces of the market’s volatility dynamics. This research contributes to the literature as follows: (1) by illustrating an event study that investigated the response of the green bond market to the shock of the COVID-19 pandemic, (2) by extending the volatility forecasting to the green bond market and (3) by revealing the driving forces of the green financial market’s volatility. The findings showed that (1) huge fluctuations and significant, negative abnormal returns appeared under the shock of the COVID-19 pandemic, (2) a green property or non-pecuniary property of a financial instrument does not help reduce the risk levels of a financial market under an extreme condition, (3) green bond volatility is largely driven by the uncertainty of the traditional fixed-income market, followed by the currency and stock markets and green infrastructure activities, (4) shocks coming from the energy market, including the renewable and non-renewable energy markets, green production and financial uncertainty, cannot spill into the green bond market and (5) markets with higher spillover effects generally produce more accurate volatility forecasts. However, forecasting accuracy decreases when a dynamic correlation becomes volatile.