Quantile dependence between carbon price uncertainty and sustainable financial markets: Evidence of nonlinear thresholds and COVID-19 structural breaks

This paper examines the dynamic and distributional relationship between carbon price uncertainty and sustainable financial markets in the context of the global low-carbon transition. Using weekly data from September 2013 to December 2022, we apply a cross-quantilogram (CQ) and wavelet quantile correlation (WQC) framework to capture nonlinear, asymmetric, and horizon-dependent dependence between the Carbon Price Volatility Index (CVIX) and three sustainable asset classes: the S&P Green Bond Index, the S&P Clean Energy Index, and the S&P 1200 ESG Index. Robustness is confirmed through a quantile-on-quantile regression (QQR) analysis, a formal threshold test, a Bai-Perron structural break test, and a COVID-19 sub-period comparison. The findings reveal heterogeneous, state-dependent relationships. Formal bootstrap significance testing indicates that clean energy equities provide a narrow but statistically significant hedge against carbon price uncertainty specifically at high CVIX quantiles, while green bonds show predominantly positive, diversifying co-movement with carbon uncertainty rather than significant hedging at any tested quantile combination. Clean energy equities and ESG investments both show a statistically significant hedging reversal beyond the 90th percentile of CVIX, confirmed by two independent formal threshold tests and stable in sign across all tested bandwidths, whereas green bonds show no such reversal and remain positively correlated with carbon uncertainty beyond the threshold. Sub-period comparisons indicate that slope magnitudes increase substantially following the COVID-19 pandemic, although formal structural break tests do not uniformly identify March 2020 as a discrete break across all three assets. Overall, the results indicate that sustainable assets' protective properties are strongly state-dependent: for clean energy equities and ESG investments, hedging protection emerges and strengthens at extreme carbon uncertainty, whereas green bonds show no comparable protective reversal anywhere in the distribution. These findings provide guidance for dynamic portfolio strategies and underscore the importance of stable, predictable carbon pricing policy for sustaining green finance market integrity.