Asymmetric Impact of Heterogenous Uncertainties on the Green Bond Market

Abstract

Investing in green bonds has been recognized as a strategy that not only promotes environmental performance but also offers attractive investment returns. However, macroeconomic factors, such as geopolitical risk (GPR), climate policy uncertainty (CPU), and global economic policy uncertainty (GEPU), play a substantial role in shaping green bond returns. Using the returns of US green bonds as a proxy for the returns of green bonds, we argue in this paper that these heterogenous uncertainty measures might have asymmetric impacts on the returns of green bonds (GB). By employing monthly data from January 2016 to August 2022, we apply the nonlinear autoregressive distributed lags model (NARDL) to examine the asymmetric impact of these heterogenous uncertainty measures on the returns of GB. The NARDL findings reveal evidence of short-run asymmetric impacts of GPR, GEPU, and CPU on the returns of green bonds. In the long run, there is an asymmetric impact of GPR and CPU on the returns of GB. However, there is a symmetric impact of CPU on the returns of GB in the long run. Specifically, in the short run, we found that a positive CPU shock causes a decline in the returns of green bonds. A similar magnitude of negative CPU shock causes an increase in the returns of green bonds. Moreover, a positive shock to GPR increases the return of green bonds, while a comparable negative shock to GPR reduces the return of GB. Furthermore, only negative shocks to GEPU have an impact on GB returns in the short run. Specifically, a negative GEPU shock reduces GB returns. In the long term, the returns of GB are positively impacted by negative shocks in GPR and both positive and negative shocks in GEPU, whereas positive shocks in GPR affect the returns of GB negatively.