Are green bonds the new quasi-havens? novel evidence from sentiment-driven volatility spillovers

We test whether green bonds behave as quasi-haven assets when crisis sentiment spikes, using COVID-19 as a natural experiment for health crisis, addressing a gap in the literature on sentiment-driven volatility spillovers. Using a Time-Varying Parameter Vector Autoregressive (TVP-VAR) model, we examine the connectedness between green bonds and major assets including the S&P 500, gold, and oil from 2019 to 2023. The findings indicate that green bonds became significant net receivers of volatility from the S&P 500, surpassing gold during the pandemic period. To assess the role of sentiment on market connectedness, we incorporate RavenPack’s Panic and Media Hype indices in Granger causality tests, revealing both as significant volatility transmitters. Particularly, media hype shows strong causal influence on connectedness. A DCC-GARCH t-Copula model further shows that spikes in sentiment, especially in early 2020, coincided with changes in asset correlations. Although green bonds generally show low correlation with traditional assets, their co-movement with gold increased during periods of market stress, reflecting partial flight-to-quality behavior. This study contributes to the literature on green finance by demonstrating that green bonds not only fulfill ESG mandates but also exhibit defensive characteristics under systemic uncertainty and sentiment shocks.