Exploring the bidirectional causality between green markets and economic policy: evidence from the time-varying Granger test.

The vigorous development of green markets and the effective mitigation of economic policy fluctuations are current hotspots that intrigue our interest in exploring the causal relationships between green market returns and economic policy uncertainty (EPU). Green bonds, corporate environmental responsibility, green technology investment, and the carbon trading market are our research objects to comprehensively understand the interaction among them, from both macro and micro perspectives. Considering the importance of temporal heterogeneity and spillover direction in causation, we employ the time-varying Granger causality method to obtain bidirectional real-time identification. We find that green market returns exhibit a time-varying bidirectional causality with EPU over most of the sample period. In contrast, green markets are more a risk spillover than a recipient. Notably, this causality is vulnerable to exogenous financial risks, especially structural changes caused by the COVID-19 pandemic. Overall, this paper provides insights into the deep-seated causes of price fluctuations, volatile market uncertainty, and the interaction mechanism between them, as well as implications for market participants and policymakers.