Differences Between Green Bonds Versus Conventional Bonds

Abstract

This chapter empirically investigates how the green bond markets price greenness. Using the liquidity-adjusted yield premium of green bonds over their synthetic conventional bonds, this study explores the possible determinants that drive green bond premiums. Evidence shows that, on average, there is no significant yield premium or discount on green bonds compared with their paired conventional bonds. Interestingly, in the case of a subsample, such as the euro and the US dollar, to control for the currency effect, most explanatory variables are not statistically significant, which suggests that a green bond premium does not exist in dollar-denominated and euro-denominated bonds, while a green bond premium does exist in other currency-denominated bonds. However, green bonds are also not standardized instruments. Certain factors, like “greenness,” are necessary to match the needs of issuers and investors. These factors might have an impact on the price, liquidity, and volatility of green bonds.

Appendix

Table A1: Variable Definition

Table A2: Descriptive Statistics for Government

Table A3: Descriptive Statistics for Financial

Table A4: Descriptive Statistics for Utilities

Table A5: Descriptive Statistics for Others

Table A6: Descriptive Statistics for US Dollar

Table A7: Descriptive Statistics for Euro

Table A8: Results of the Step 2 Regression (OLS): US Dollar Sample

Table A9: Results of the Step 2 Regression (OLS): Euro Sample