Heterogeneous impact of economic and political uncertainty on green bond volatility: Evidence from the MRS-GARCH-MIDAS-Skewed T model

Abstract

Green bonds attract increasing attention as a new eco-friendly investment product. We explore the heterogeneous impact of low-frequency economic and political uncertainty across high or low uncertainty states on green bond volatility in order to accurately analyze the green bond market risk. To this end, we propose a new Markov regime switching GARCH-MIDAS-Skewed T model, in which the regime switching behavior occurs on the low-frequency long-term volatility. An effective filtering estimation method is put forth by introducing the likelihood of the low-frequency sub-sample set. The evidence supports that there are significant time-varying and state-dependent impacts from uncertainty shocks on the volatility of green bonds, including monetary policy, inflation, and crude oil prices as well as global economic policy and political environment. In addition, we find the counter-cyclical behavior of green bond volatility, which increases in the period of economic recession or financial turbulence with expanding uncertainty. Improving the hedging ability of green bonds against uncertainty risks effectively contributes to low-carbon economic development.