Abstract

Green bonds have emerged as a significant instrument in sustainable finance, yet their role in portfolio risk management, particularly in highly developed Small Open Economies (SOEs) economies, remains underexplored. This study investigates whether green bonds can reliably hedge against routine equity-market fluctuations and whether they act as safe-haven assets during episodes of extreme stress, such as the COVID-19 pandemic and the Russia–Ukraine war. Focusing on daily returns for equity indices from twelve highly developed Small Open Economies (SOEs) countries and a global green bond index over the period 2014–2023, employed by dynamic conditional correlations (DCC), fixed-effects panel regressions with crisis interaction terms, and country-level OLS robustness checks with Newey–West corrections. The results indicate that green bonds provide partial hedging benefits in tranquil periods for a subset of markets (e.g., Norway, the Netherlands, Finland, Belgium, Iceland), while others exhibit weak or even positive co-movement with equities (e.g., Denmark, Israel). During the COVID-19 crisis, safe-haven performance is heterogeneous, with some countries showing improved protection and others experiencing a reversal. The Russia–Ukraine war produced weaker and less consistent shifts. Robustness checks—advancing the COVID-19 onset to 1 February 2020 and re-estimating the specification at the country level with HAC (Newey–West) inference—left the qualitative conclusions unchanged. Overall, green bonds in highly developed Small Open Economies (SOEs) markets offer limited and context-dependent hedging capacity, and their safe-haven properties are not consistent across crises. These findings carry implications for investors seeking resilient sustainable portfolios and for policymakers considering the integration of green bonds into financial stability frameworks.

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