Unravelling green bond reactions to energy price volatility amid rising policy uncertainty

Abstract

This paper investigates the impact of energy, oil, natural gas, and coal price volatility on green bond performance. It also explores how two types of policy uncertainty, economic, and climate-related, influence this relationship. Using Fourier-augmented autoregressive distributed lag and mixed-data sampling methods, the findings reveal that energy price volatility, as well as oil and natural gas price volatility, weakens green bond performance in the short run. In contrast, coal price volatility shows a positive impact. The results further show that both economic and climate policy uncertainty soften these short-run effects, with economic policy uncertainty having the stronger influence. This suggests that investors are more vulnerable to the instability of macroeconomic policies due to their direct impact on financial well-being. In the long run, while the impact of energy, oil, and natural gas price volatility remains negative, the impact of coal price volatility turns negative. This indicates the absence of effective government intervention in the coal market. The results further reveal that economic and climate policy uncertainties are the main drivers of the adverse impact of energy, oil, natural gas, and coal price volatility on green bond performance. Overall, this paper demonstrates that whether energy price volatility acts as a barrier or catalyst depends on the type of energy and the stability of economic and climate-related policies.