Green bond and green stock in China: The role of economic and climate policy uncertainty

Green finance (GF) plays a key role in combating climate change and advancing sustainable economic development. At the same time, governments have enacted various policies to pursue climate action and economic stability simultaneously, resulting in economic policy uncertainty (EPU) and climate policy uncertainty (CPU). While the EPU and CPU may have an impact on the GF market, they may also interact with each other and the impact of this interaction has received little attention. Therefore, it becomes crucial to understand how EPU and CPU affect GF. This paper explores the relationships among green bonds (GB), green stocks (GS), EPU and CPU in the context of China. Firstly, the nonparametric quantile causality test reveals the existence of causality in EPU/CPU-GB, EPU/CPU-GS, EPU-CPU, and GB-GS. The cross-quantilogram test result indicates that the negative predictive effects of EPU and CPU on the GF market are mainly concentrated at the extreme quantiles and an interaction exists between CPU and EPU. In addition, a negative correlation between the GB and GS markets is found in the short term suggesting that investors may achieve hedging risk and/or portfolio diversification if investing in these two green financial assets. The findings shed light for policymakers and relevant investors on how EPU and CPU shocks affect GF, and provide ideas on how to effectively hedge (deal with) these shocks in the asset allocation (policy making) process, thereby enhancing the development of the GF market.