Different Shades of Green: Estimating the Green Bond Premium using Natural Language Processing

Emanuela Benincasa, Jonathan Fu, Mrinal Mishra and Adityavardhan Paranjape
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Emanuela Benincasa: University of Zurich and Swiss Finance Institute
Jonathan Fu: University of Zurich
Mrinal Mishra: University of Zurich
Adityavardhan Paranjape: Zurich Insurance Group

No 22-64, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We document the existence of a premium in the green bond market based on the greenness of green bonds. Using BERT, a natural language processing method for textual analysis, we develop a novel measure for bonds’ greenness and document that a 10 percent increase in the bond’s greenness corresponds to a decrease in annualized yield by between 4.86 to 8.71 basis points. In addition to greener bonds enjoying higher premiums, we find evidence that issuing a green bond has positive spillover effects on the pricing of subsequent conventional bonds’ issuance. Overall, our findings are consistent with firms relying on “green" debt instruments to lower capital costs and raise cheaper financing.

Keywords: Green bonds; BERT model; Sustainable Finance; Bond premium (search for similar items in EconPapers)
JEL-codes: G12 Q56 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2022-08
New Economics Papers: this item is included in nep-ene and nep-env
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2264

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