Long-term correlation between the green and conventional bond markets: The roles of categorical EPU indices and structural changes

Hongwei Zhang, Shiyao Wei and Yaoqi Guo

Research in International Business and Finance, 2025, vol. 77, issue PA

Abstract: This study investigates the dynamic correlation between the green and conventional bond markets affected by different categories of economic policy uncertainty (EPU) using the DCC-MIDAS-X model. The results show that EPU has a significant negative impact on the long-term green-conventional bond correlation and most of the categorical EPU indices exhibit a negative impact on the long-term correlation. Furthermore, the study reveals structural changes during the COVID-19 pandemic and incorporates them into the DCC-MIDAS-X model, uncovering additional negative effect on the impact of some categories of EPU. Finally, the study examines the risk management performance using green and conventional assets. The results demonstrate that the green bond can be regarded as an efficient diversification tool for conventional bond assets and incorporating different categorical indices causes different effects on the efficiency. These findings offer valuable insights for investors and policymakers in mitigating risk across green and conventional bond markets under the period of rising EPU and frequent structural changes.

Keywords: Economic policy uncertainty; Green-conventional bond correlation; DCC-MIDAS model; Portfolio management; Structural changes (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:77:y:2025:i:pa:s0275531925001382

DOI: 10.1016/j.ribaf.2025.102882

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