Green Bonds yield-to-worst during the pandemic: a VARX approach

The paper is an investigation on the dynamic spillovers between the change of yield-to-worst of green bonds (ΔGREEN) and the change of market variables like brown bonds, stock, gold over the pandemic year. Our data refer to global issuers. Moreover, the study includes the General Fear Index (Salisu & Akanni, 2020), as a proxy of the market’s fear for Covid. The analysis is conducted through a three lags VARX model, where the slope of the 5Y-1Y US Treasury bonds stands for the exogenous variable, in order to indicate the short-medium term liquidity of the market. We also make a comparison with the previous five years. Our main results, show that the impact of the change of the market fear for the pandemic is positively significant for each lag of the variable. Moreover, the exogenous one is significant for each endogenous variable in both periods of analysis. The Granger causality test shows a bi-directional predicting power between the change of green yield-to-worst and the change of brown bonds and gold while, with reference to the other variables, the test has a one-direction significant result from ΔGREEN to them. To the best of our knowledge this is the first study that adopts the yield-to-worst for the analysis of green bonds. The choice is justified by the aim to observe bonds in period of turmoil, like the pandemic year. We deem that our research could give useful information to sustainable investors, in order to make them aware of the worst market scenarios.