Can blue bonds offer true diversification? Insights from time-frequency analysis

Abstract

This study provides the first evidence of the interdependence and causality between blue bonds and various financial indices across different time and frequency scales. Using wavelet coherence analysis, our findings reveal a low overall dependence between the blue bond index and most of the indices considered in this study. In addition, periods of notable global market increases have a significant impact on blue bond index returns in the medium term. Specifically, during times of high market certainty, investors tend to reallocate their investments from traditional safe-haven assets such as treasury bills and gold to other assets, including blue bonds. Overall, our findings confirm that the blue bond market remains in its nascent stage, suggesting its potential as a new investment avenue for portfolio diversification. Additionally, our findings align with previous studies highlighting the need to enhance investor confidence, which is essential for attracting more investment and, consequently, can enhance the performance of the blue bond market.