Unveiling the volatility connectedness and hedging effectiveness between green ETFs and cryptocurrencies: evidence from dynamic short-term perspective

Purpose This study aims to analyze the behavior of volatility connectedness among green exchange-traded funds (ETFs) and cryptocurrency markets. The study also examines the hedging effectiveness between green ETFs and cryptocurrencies. Design/methodology/approach This study uses a Time-Varying Parameter Vector Autoregression (TVP-VAR) model to highlight the salient facts of volatility connectedness between green ETFs and cryptocurrencies during the period 22 / 10 / 2021–05 / 01 / 2024. Findings The empirical findings reveal that cryptocurrencies (particularly, Bitcoin and Ethereum) consistently act as net transmitters of shocks, amplifying systemic risk during crisis periods. However, green ETFs primarily behave as net receivers, providing a conditional and modest hedging or safe-haven role. Portfolio-level analyses indicate that green ETFs (especially ICLN) help reduce overall portfolio risk within Minimum Variance Portfolios (MVP) under turbulent market conditions, enhancing risk-adjusted returns when included alongside cryptocurrencies. Conversely, cryptocurrencies contribute to substantial diversification benefits in terms of Minimum Correlation (MCP) and Minimum Connectedness Portfolios (MCoP) but exhibit higher volatility and tail-risk exposure. Dynamic Sharpe ratio analysis further demonstrates that no single allocation dominates across market regimes; instead, adaptive strategies – switching between MVP during calm periods and risk-parity portfolios (RPP) during crises – yield superior performance. These findings underscore the conditional stabilizing role of green ETFs and the dominant diversification and risk-transmission role of cryptocurrencies, highlighting important implications for portfolio management, sustainable investment and regulatory oversight in integrated digital and green finance markets. Practical implications The empirical findings offer insightful implications for policymakers, regulatory authorities and investors to promote sustainable and strategic allocation, as well as support and expand sustainable investment markets. Originality/value This study explores if and to what extent cryptocurrencies could be linked to green ETFs. It also examines the diversification and hedging features of green ETFs for portfolio including Bitcoin and Ethereum given the ongoing debate regarding the effective hedging instruments for cryptocurrency portfolios.