The market price of greenness: a factor pricing approach for green and conventional bonds

Beatrice Bertelli, Gianna Boero and Costanza Torricelli ()
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Beatrice Bertelli: University of Modena and Reggio Emilia
Gianna Boero: University of Warwick
Costanza Torricelli: University of Modena and Reggio Emilia and CEFIN – Center for Studies in Banking and Finance

Annals of Finance, 2025, vol. 21, issue 3, No 3, 317-350

Abstract: Abstract This paper distinguishes itself from previous studies and contributes to the literature by estimating a green premium using a factor model framework. Specifically, we propose a two-factor model, where bond returns are explained not only by a systemic market risk factor but also by a systemic green risk factor. Using the Fama and MacBeth regression approach on a sample of Euro-denominated green and conventional bonds over the period 06.11.2014–30.06.2021, we estimate the green premium disentangling its two components: the sensitivity to systemic greenness (i.e. magnitude of risk) and the price of green risk. Three main results emerge from our research. First, we find that the price of green risk is significant and positive albeit small. Second, the sign of the green premium is substantially driven by the issuer macro sector rather than by the green label, being on average negative for Financial bonds and positive for Government and Non-Financial ones, whereby this difference can be explained by a more direct exposure to green systemic risk in the latter two cases. Third, looking at the dynamics of the green risk price we find it decreases to almost zero as the bond market reaches a new normal, but it becomes negative during Covid-19 pandemic, suggesting greenness is considered a benefit in periods of financial distress caused by negative economic shocks.

Keywords: Green bonds; Green premium; Sustainable finance; Factor models; Asset pricing (search for similar items in EconPapers)
JEL-codes: C21 C22 G11 G12 Q01 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10436-025-00469-6

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