MONETARY POLICY UNCERTAINTY AND GREEN BOND YIELDS: A QUANTILE-CONNECTEDNESS ANALYSIS

Abstract

This paper employs a quantile-connectedness framework to study the links between monetary policy uncertainty and green bond yields. Earlier studies showed that monetary policy can affect various markets. However, little is known about the effect on green bonds. The impact of monetary policy on financial markets has a long history. However, in the recent past that interest has developed in the context of sustainable investments, green bonds in particular. The data includes green bond yield, interest rate uncertainty and key economic variables over the dynamic period of 10 years. A quantile-connectedness technique investigates the linkages across different quantiles of green bond yield, revealing that monetary policy uncertainty affect segments of the bond market differently.  According to our findings, the MPU has a notable role in influencing green bond yields. The strongest effects are observed during periods of economic uncertainties. The findings add to the literature about how MPU affects environmentally sustainable investment assets.  The conclusion goes over the policy implications for central banks and investors operating amidst monetary policy uncertainty and the associated risks of green bonds.

Keywords: monetary policy uncertainty, green bond yields, quantile-connectedness, financial markets, economic uncertainty, sustainability investments.