The market price of greenness A factor pricing approach for Green Bonds

Beatrice Bertelli, Gianna Boero and Costanza Torricelli

Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) from Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi"

Abstract: Fostered by an empirical literature providing disparate evidence on the green premium, we propose a two-factor model to explain returns on green bonds not only as a function of market risk but also of the bond greenness. The second factor can be interpreted as a greenness premium, which can be either positive or negative depending on the product of the price given by the market to greenness and the sensitivity of the specific green bond to the latter. Based on the model proposed and its Fama-Mac Beth estimation on a sample of Euro-denominated bonds over the period 08.10-2014-31.12.2019, we are able to conclude that the market does price greenness, but the price is very small: including Government green bonds is 0.7 bps, and focusing on corporate green bonds only is – 1.3 bps. In all cases the dynamics of the price for greenness has a positive drift as the market reaches a more mature phase, landing to a positive average value (2 bps), which implies greenness being viewed as a small penalty. However, differences emerge when we look at the issuer sector level and at single bonds, thus our model is able to explain the disparate empirical evidence provided by the literature on the greenium. On the whole, results hint to a market where the difference in pricing between conventional and green bonds is, ceteris paribus, shrinking, which is consistent with greenness becoming a new normal. These results are of interest for many economic agents, including market participants and financial intermediaries, whereby the latter are also called by the regulator to manage their portfolio in consideration of climate risk

Keywords: green bonds; green premium; sustainable finance; factor models; asset pricing (search for similar items in EconPapers)
Pages: pages 40
Date: 2021-06
New Economics Papers: this item is included in nep-ene, nep-env and nep-fmk
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Citations: View citations in EconPapers (5)

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