Description:
The long-term and sustainable development focuses of green bond together with its increasing popularity urges to get better understandings on its hedging effects against market risks. Our study investigates whether and how green bond can act as a hedging instrument against the implied volatility, a measure of forward-looking market uncertainty. We find evidence of significant time-varying connectedness between green bond and implied volatilities of stock, energy, and commodity markets. Building on this characteristic, investors are required to adapt the active portfolio management strategy to ensure the hedging effectiveness of green bond against implied volatilities. More specifically, this strategy requires frequent switches between long and short position in green bond market. Our simple simulation study shows evidence that applying connectedness regime-dependent trading strategies can increase the hedging effectiveness of green bond against implied volatilities in term of risk-adjusted return