INVESTOR SENTIMENT AND THE PERFORMANCE OF GREEN BOND MARKETS

Thuy Duong Le

doi:10.60867/00000170

This thesis examines the influence of multifaceted investor sentiment on green bond market performance through four interrelated hypotheses. First, it investigates the aggregate effect of sentiment, measured via both direct and indirect proxies, on global green bond outcomes. Second, it analyses spillover dynamics across eleven leading green bond markets, with particular attention to the role of direct versus indirect and domestic versus foreign sentiment in the transmission of these green bond returns. Third, it differentiates between individual and institutional investor sentiment, assessing their heterogeneous impacts on green bond returns across markets in both domestic and foreign contexts. Fourth, it examines sentiment contagion between investor types and its implications for green bond performance in different markets. The study employs three methodologies: Generalised Autoregressive Conditional Heteroskedasticity (GARCH)-Mixed-Data Sampling (MIDAS), hereafter GARCH-MIDAS; Time-Varying Parameter Vector Autoregression (TVP-VAR); and the Quantile-on-Quantile (QQ) model. The GARCH-MIDAS approach is used throughout the research to address the mismatch in data frequency between monthly investor sentiment data and daily green bond index returns. The TVP-VAR measures the spillover effects among eleven green bond returns and the sentiment contagion between individual and institutional investors. The QQ regression model provides visual estimates of the varying impacts of investor sentiment on green bond market performance across different levels of both dependent and independent variables. The research uses multiple datasets to test four hypotheses. Hypothesis 1 employs the returns of the global green bond index as the dependent variable, while World Sentix and the market turnover ratio serve as proxies for global direct and indirect investor sentiment, respectively. To test Hypothesis 2, it utilises data on green bond indices, consumer confidence indicators, and market turnover ratios of eleven leading green bond markets. Hypotheses 3 and 4 are investigated using the same green bond data for individual and institutional investor sentiment indicators for China, Japan, the U.S., and the EU. The data period in this thesis spans from November 1, 2021, to February 28, 2026. The findings of this thesis indicate that investor sentiment is a critical determinant of green bond market performance. Firstly, at the global level, investor sentiment significantly affects the development of the green bond market, with indirect sentiment having a greater impact than direct sentiment. Secondly, the eleven advanced green bond markets exhibit strong spillover effects, with China and the U.S. being net risk receivers. The study finds that direct and indirect investor sentiment plays important roles in these spillovers. Thirdly, when separating the sentiment of individual and institutional investors, the thesis documents the significant relationship between these sentiments and green bond returns. These effects vary across investor types, green bond markets, and levels of green bond returns and sentiment, in both domestic and foreign contexts. Fourthly, there is a contagion between the sentiment of individual and institutional investors. Notably, this contagion has a nontrivial impact on the performance of green bond markets. Again, the effects are heterogeneous across countries and levels of green bond returns and investor sentiment and remain evident when foreign investor sentiment is considered. The results of the empirical analysis in this thesis are significant for theories, regulators, and investors. The findings, covering diverse aspects of investor sentiment and green bond market performance, extend and refine existing theoretical frameworks, including those of behavioural finance, emotional contagion, and financial contagion. The research findings on the crucial role of indirect and foreign investor sentiment in green bond returns provide policy implications for regulators. Accordingly, governmental bodies need to construct sentiment-based indicators and green bond performance indices, particularly for indirect and foreign measures, and to develop regulatory frameworks to incorporate them into green bond market regulation. The results of this thesis also benefit green bond investors. On the one hand, knowing the significant effects of various dimensions of investor sentiment, including direct versus indirect, individual versus institutional, domestic versus foreign, and sentiment contagion, offers investors an effective lens to value green bonds across markets. On the other hand, net risk transmission and receipt positions across international green bond markets help investors develop optimal hedging strategies.

INVESTOR SENTIMENT AND THE PERFORMANCE OF GREEN BOND MARKETS

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