Time-frequency connectedness and volatility spillovers among green equity sectors: A novel TVP-VAR frequency connectedness approach

Investment in green equity market is growing more specifically after COVID-19 due to rising awareness of climate and environmental issues. Investors and policymakers require updated information about the connectedness and shock spillover pattern among green sectors to manage portfolios effectively. The novel TVP–VAR frequency connectedness approach is applied to daily volatility series of green equity indices to explore the volatility spillover dynamics in the time-frequency domain. The findings demonstrate strong interlinkages among green sectors that have become more pronounced during crisis events, with water, energy efficiency, green building and recycling as the largest transmitters of volatility shocks, being considered as systemically important sectors. In contrast, bio-clean fuels, healthy living, advanced materials and natural resources are primary risk absorber sectors. The dynamic analysis reveals the heterogeneous behavior of sectors during turmoil periods. Additionally, the frequency decomposition analysis reveals that volatility spillover is mainly concentrated in the short run, suggesting diversification opportunities for investors in the long run. Empirical findings help investors and policymakers to manage risk in the green equity market. Understanding how sectors influence market instability is crucial. Policymakers must closely and systematically monitor important sectors to prevent systemic risk, as shocks in these sectors can spread to others.