Abstract
This study aimed to investigate the return connectedness between Sukuk and green bonds at the middle, left and right tail using the new quantile-based connectivity methodology from Ando et al. (2018). We find that the average level of connectedness estimated at the mean/median is lower than that estimated at the left and right quantiles. Therefore, return connectedness between Sukuk and green links is higher in the left and right tails, indicating that the application of the mean-based connectivity measure is inappropriate. Next, we show that the connectedness of returns varies over time but varies less in the tails. In particular, the dynamic connectivity analysis indicates that the COVID-19 pandemic has significantly impacted the Sukuk and green bond markets. The Return connectedness driver's analysis shows the importance of macroeconomic conditions, particularly in the middle and lower quintiles. The US dollar bodes well positively for both bears and bulls, while uncertainty in equity markets amplifies return spillovers in the lower quintile. Moreover, the weak return spillovers between Sukuk and green bonds indicates that there is indeed an opportunity for optimal asset allocation. The highest hedging efficiency can be achieved by taking short positions in US Green Bonds.
•Sukuks and green bonds connectedness is examined under extreme cases.•The connectedness of returns varies over time but varies less in the tails.•Dynamic connectivity analysis indicates that the COVID-19 pandemic considerably influenced the Sukuk and green bond markets.•The Connectedness driver's investigation reveals the significance of macroeconomic conditions at the middle and lower tails.