Do the Green Bonds Markets React to Political Uncertainty and Financial Stress Alike?

Abstract

This study investigates the dynamic relationship between political uncertainty (EPU), financial stress, and green bond returns, utilizing the Range-DCC GARCH model and wavelet coherence analysis. The primary objective is to assess how these factors interact during periods of economic and geopolitical turmoil, specifically the 2014-2016 oil crisis and the COVID-19 pandemic. Our findings reveal a positive correlation between political uncertainty and green bond returns during these crisis periods, suggesting that green bonds act as a safe haven or diversification tool when facing heightened uncertainty. The Range-DCC GARCH model confirms that EPU significantly impacts green bond returns in times of crisis, while the wavelet coherence analysis uncovers a time-frequency co-movement between financial stress, political uncertainty, and green bond performance, particularly during major disruptions. These results contribute to the understanding of green bonds’ role as a resilient investment asset during times of volatility. From a practical perspective, these findings offer valuable insights for investors and policymakers seeking to enhance risk management and sustainable investment strategies amid growing uncertainties. Future research could build on these insights by incorporating additional dimensions of uncertainty such as climate risk and environmental policy uncertainty to better understand their differentiated impacts on green bond market behavior and resilience.