The dependence of Chinese green and conventional bond markets under extreme and normal market conditions

Green bond is a relatively new fixed-income financial instrument created to fund sustainable development projects. Since green and conventional bonds can both bring benefits to investors and given that China has become an important but unique green bond market, it is of great significance to explore the relationship between Chinese green and conventional bond markets. Using the monthly data from 2010 to 2019, we investigate the dependence structure between Chinese green bond market and five conventional bond markets, namely treasury, interbank, financial, high-yield corporate, and enterprise bond markets. The dependence structure is investigated using Gumbel Rotated Gumbel (GRG) copula with Markov-switching that allows for a more thorough analysis. The dependence under extreme market conditions is analyzed using tail dependence coefficients, whereas the dependence under normal market conditions is examined using quantile-based dependence measures. The results show that although the green bond market is positively correlated with all the five conventional bond markets, the degree of positive dependence differs under extreme and normal market conditions.