Asymmetric bidirectional relationships between green attention index, green and conventional bonds in a regime-switching environment: evidence from N-ARDL approach

This study initially constructs a monthly green attention index using Google Trends and subsequently investigates the bidirectional asymmetric relationship between this index and green and conventional bond returns in the bull and bear regimes. This study builds upon Da et al. (2015) methodology to establish a monthly green attention index for the United States of America. Secondly, we introduce an innovative methodology using the non-linear autoregressive distributed lag (ARDL) model to detect both short-term and long-term relationships within this index, considering green and conventional bond returns, while distinguishing between bull and bear regimes through a switching model to enhance the understanding of market dynamics. In the long run, our results revealed that during bullish markets, there's a positive asymmetric association between the green attention index and both types of bonds, implying a diversifying role in bond returns. However, in bearish markets, both green and conventional bonds showcase a long-term safe haven role. While the green attention index acts as a safe haven for both bonds, its impact is notably more negative during bearish phases, emphasizing its significant safe-haven characteristic. On the other hand, in the short run, the study suggests that the green attention index acts as a robust safe haven, whereas conventional bonds may not effectively hedge or serve as safe-haven assets for the green attention index. Conversely, in bearish markets, both green and conventional bonds serve as strong safe havens in the long term. Overall, the green attention index might not effectively operate as hedging or safe-haven assets for either conventional or green bonds in both short- and long-run scenarios. Finally, while examining the variation of dynamic multiplier adjustments for the green attention index and green and conventional bonds, we concluded that the effect of a negative shock in green and conventional bonds dominates that of a positive shock in the short run. Understanding the changing roles of green and conventional bonds as diversifiers or safe havens extends implications to financial institutions, market participants and portfolio managers, emphasizing the need to shape robust investment strategies, optimize asset allocation across different market conditions and reconsider risk mitigation strategies to enhance resilience against market volatilities. This paper makes dual contributions to the burgeoning field of green finance. Firstly, it draws upon the methodology established by Da et al. (2015) as a foundational framework to create the monthly green attention index specifically tailored for the United States of America. Secondly, our research adds a distinctive layer to the existing empirical knowledge by introducing a pioneering model that effectively oversees both short- and long-term interactions while accounting for potential asymmetries within these relationships. To achieve this objective, we employ the nonlinear autoregressive distributed lag model. These contributions collectively enrich the understanding and practical application of green finance methodologies, laying a stronger foundation for future research and financial decision-making within sustainability frameworks. Thirdly, this research identifies a specific contribution of notable interest to portfolio managers and investors, enabling them to tailor their portfolio strategies accordingly in response to different market conditions. Such insights hold the potential to profoundly impact investment decisions within diverse market regimes.