Geopolitical risk: An opportunity or a threat to the green bond market?

Abstract

Against the backdrop of growing political instability, the interaction between green bond prices (GBP) and geopolitical risk (GPR) has attracted widespread attention. By employing the rolling-window Granger causality method, we probe their dynamic relationship and investigate GPR's role in shaping green bond (GB) market prospects. Our outcomes disclose that GBP is positively and negatively affected by GPR. The favourable effect suggests that GPR creates an opportunity for the GB market development, which also reveals the significance of GB as a hedge asset in times of geopolitical turmoil. However, high GPR can raise investors' concerns about the GB market outlook, and the reduction in investment demand causes GBP to decline. In contrast, GBP produces a favourable shock in GPR, as interest competition for renewable energy backed by GB will exacerbate the outbreak of geopolitical conflicts. In the context of geopolitical turmoil, investors can include GB in their portfolios to mitigate external shocks from the geopolitical environment. Moreover, governments can predict GPR changes by grasping the GB market fluctuations, thereby reducing the adverse effects triggered by geopolitical shocks.