Can green bond hedges climate policy uncertainty in the United States: New insights from novel time-varying causality and quantile-on-quantile methods?

Abstract

Climate policy uncertainty (CPU) raises concerns about financial instability and creates several macroeconomic challenges for the United States. Therefore, hedging against climate policy uncertainty risk is essential for formulating appropriate policies for efficient risk management. This study explores the relationship between climate policy uncertainty and green bonds, evaluating whether green bonds can hedge climate policy uncertainty risk and enhance the stability of the United States’ climate policy environment. Against this background, bootstrap full-sample and subsample rolling-window Granger causality tests are employed to investigate the mutual influences between climate policy uncertainty and green bonds (measured by GBI). The positive impact of climate policy uncertainty on green bonds highlights that green bonds can mitigate uncertainty risks. However, this perspective cannot be confirmed through negative influences, as the green bond market is also determined by public confidence and speculative bubbles. Therefore, the characteristics of instability reveal that green bonds should not always be used to hedge against climate uncertainty risks in the United States. These results are supported by the general equilibrium model, which underscores a certain impact of climate policy uncertainty on green bonds. In turn, the positive influence of green bonds on climate policy uncertainty indicates that the green bond market can provide insights into predicting climate policy uncertainty. Additionally, using the quantile-on-quantile (QQ) method reveals a mutual influence between climate policy uncertainty and green bonds in short, medium, and long term. Under severe extreme weather conditions and complex economic environments, investors and government can benefit from the green bond market to optimise their investments. However, they should mitigate potential risks associated with green bond volatility to avoid significant losses and reduce climate policy uncertainty.