Uncertainties and green bond markets: Evidence from tail dependence

Abstract

Motivated by a lack of studies related to macro risk‐driven green bond markets, this paper detects the tail dependence of the USA and China green bond markets on three uncertainty indicators. We applied a novel cross‐quantilogram method to address this issue and utilised the quantile causality test for robustness, as well as to capture predictive causalities. The results show that three selected uncertainty indicators are important drivers for the returns and volatilities of green bond markets. However, all three indicators play different roles in the two nations. The most influential determinant of US green bonds is financial uncertainty, whereas in China, it is economic policy uncertainty. Additionally, the impact on green bond returns varies in different market states, and green bond volatilities may respond abnormally to extreme increasing changes in these uncertainties. These findings imply the unique financial characteristics of two green bond markets and heterogeneities between different countries. The corresponding investment implications and policy significance are discussed in detail in the concluding section.

Can green bonds be a safe haven for equity investors?

“…Hung (2021) finds bidirectional connections between green bonds and stock markets, while Saeed et al (2020) find that clean energy stocks provide a more effective hedge than green bonds for energy exchange traded funds (ETF) and crude oil prices. Lin and Su (2022) show that green bonds are driven by financial uncertainty in the US (and economic uncertainty in China), making them more sensitive to financial market downturns and thus less likely to be effective safe-haven assets.…”

Finansal Piyasaların Evrimi: Bankacılık, Risk Yönetimi, Piyasa ve Kurumlar

“…Lee et al (2022) examine the relationships between oil shocks, geopolitical uncertainties, and green bond returns for the period from January 2010 to May 2021 and their findings reveal that positive changes in geopolitical risk positively affect green bond returns. Lin and Su (2022) study the relationship between macro risks, uncertainty indicators, and green bond markets in the U.S. and China using a crossquantilogram method and quantile causality test, and find that uncertainty indicators have a significant impact on green bond market returns and volatilities in both countries.…”

“…Although these sustainability-focused bonds, also known as climate bonds, have similar characteristics to conventional bonds in terms of pricing and rating, they differ in that their proceeds must be used to finance environmentally friendly projects to create a climate -resilient economy (Reboredo, 2018) 2 . As a prominent financial instrument for reallocating the required financial resources to finance projects focused on environmental sustainability, they have received increasing attention from policymakers and investors since their first issuance by the European Investment Bank (Broadstock and Cheng, 2019;Piñeiro-Chousa et al, 2021;Lin and Su, 2022). Although it was not seen as an attractive financial product for both investors and issuers at first, the global capitalization of green bond markets has begun to be widely accepted after the Paris Climate Agreement (2015), which held to fight the climate change problem and deliver a low-carbon economy.…”

The impacts of global economic policy uncertainty on green bond returns: A systematic literature review

“…This implies that the market for green bonds may grow in response to higher oil prices, suggesting that green bonds could be a useful tool for reducing the impact of oil price shocks. Lin and Su [30] examined the relationship between three uncertainty indicators—financial, oil market, and economic policy—and the tail dependency of the green bond markets in the United States and China. In order to capture predictive causal links, they performed the quantile causality test for robustness and utilized a novel cross-quantilogram method to address this problem.…”