Abstract
Green bonds have become crucial for funding climate initiatives by supporting projects that reduce carbon emissions and promote environmental sustainability. However, the green bond market remains relatively young and thus, both issuers and investors encounter significant uncertainties. This study investigates the short- and long-term effects of various uncertainties on global green bond returns and these are global market risk, geopolitical risk and environmental risk - both physical and transition risks. The study uses the maximal overlap discrete wavelet transform (MODWT) to separate short-term and long-term components, in investigating whether different risks are incorporated into the pricing of green bond returns and how pricing may be influenced by the frequency of risk and bond returns. Subsequently, a multivariate quantile regression analysis is employed to measure systematic bond risk and idiosyncratic green bond risks, consistent with the International Capital Asset Pricing Model (ICAPM). While short-term systemic risk averaged slightly over 41%, long-term coefficients averaged less than 1%. This suggests a diminishing impact of systemic risk on green bond returns over time. For global market risks, stable and bear market conditions positively impact long-term profits, whereas bullish conditions have the opposite effect. In the long run, extreme market conditions, whether optimistic (bull) or pessimistic (bear), can negatively impact green bond returns, especially when global market risk is low. Regarding environmental risk, adverse effects are observed only for transition risk in bear markets. Conversely, physical risk exhibits favourable long-term effects across all quantiles and consistent with short-term findings. Therefore, investing in green bonds in the long term offers significant compensation for physical climate risk. Finally, a quantile-on-quantile methodology is used to further examine how various risk conditions, including high, medium and low risk, influence green bond returns under diverse market conditions, such as bull, stable, and bear markets. In bull market conditions, global market risk and geopolitical risks display positive impacts on green bond returns in both the short and long-run. Higher transition risks are associated with lower returns in the green bond market, while low physical risk is associated with higher returns. In the long-term, stable green bond markets with low global market risks yield the highest long-term returns for investors. Geopolitical risk exhibits a positive risk-return relationship, but its impact on the bond market is less pronounced during bullish periods. Lastly, both physical and transition climate risk is unaffected by different market conditions in the short and long-run.