The Eligibility of Green Bonds as Safe Haven Assets: A Systematic Review

Abstract

This study follows Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA) to examine the existing literature on the connectedness of green bonds with other markets as an attempt to highlight the effectiveness of green bonds in risk management and the benefits associated with incorporating green bonds in investment portfolios. An extensive search of relevant research papers to the scope of the review led to the identification of 31 articles published by February 2022. Our analysis traces the evolution of studies on green bonds’ interactions with other markets, the methodologies and data frequencies used for cross-market relations analysis, and the role of green bonds in portfolio risk management (diversifier, hedge, and safe-haven) in normal and extreme market conditions. The study reports several interesting findings. First, green bonds can be a strategic safe-haven avenue for investors in stocks, dirty energy stocks, and the foreign exchange market in the US and China in extreme market downturns. Second, green bonds demonstrated hedging properties against spillovers from Bitcoin, forex, soft commodities, and CO2 emission allowance. Third, the role of green bonds in the markets of natural gas, industrial metals, and crude oil is limited to a portfolio diversifier in different investment horizons. Fourth, green bonds had no diversification or hedge benefits for investors in conventional bonds. Fifth, the interrelationships between green bonds and most markets’ understudy were influenced by macroeconomic and global factors such as the COVID-19 pandemic, economic policy uncertainty, OVX, and VIX. Our review of the literature also facilitated identification of future research topics. The outcome of the review offers insightful information to investors in green bonds in risk management and assets allocation. Policy makers can benefit from this review in effective policy legislation for the advancement of the green bonds market and acceleration of a smooth transition to a net zero emission economy.