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Keen for Green - A Study of Pricing in the Secondary Green Bond Market

Anderkrans, Rickard LU and Johannesson, Patrik LU (2019) BUSN79 20191
Department of Business Administration
Abstract
The emerging green bond market is a novel research area with only a few studies being published in recent years. The increase in interest from issuers, investors, and academia shows the clear need for further investigation of the pricing dynamics affecting the green bond market. This study finds its theoretical foundation in the capital asset pricing model (CAPM), aiming to establish whether investor preferences toward nonpecuniary factors such as sustainability bring investor utility, challenging the original CAPM assumptions. If so, investors would demand lower financial returns as they find utility in the fact that green bonds cater to their sustainability preferences. We study the secondary green bond markets between 2014 and 2018 to... (More)
The emerging green bond market is a novel research area with only a few studies being published in recent years. The increase in interest from issuers, investors, and academia shows the clear need for further investigation of the pricing dynamics affecting the green bond market. This study finds its theoretical foundation in the capital asset pricing model (CAPM), aiming to establish whether investor preferences toward nonpecuniary factors such as sustainability bring investor utility, challenging the original CAPM assumptions. If so, investors would demand lower financial returns as they find utility in the fact that green bonds cater to their sustainability preferences. We study the secondary green bond markets between 2014 and 2018 to investigate if there exists a negative yield premium when comparing a sample of green bonds with their non-green counterparts. The quantitative methodological approach includes OLS and issuer fixed effect regressions. Our differentiated sampling process allows us to construct the largest sample of green bonds compliant with the Green Bond Principles to date. We conclude that there exists a negative green bond premium of -4 to -5 basis points. Our findings also indicate that the green bond premium is not stable over time, with significantly negative yield premiums in 2017 and 2018. Our results remain robust after additional controls for potential liquidity differences, indicating strength in the statistical inferences. (Less)
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author
Anderkrans, Rickard LU and Johannesson, Patrik LU
supervisor
organization
course
BUSN79 20191
year
type
H1 - Master's Degree (One Year)
subject
keywords
Green bonds, Panel data, Issuer fixed effects regression, Capital asset pricing model, Investor preference
language
English
id
8979887
date added to LUP
2019-09-30 13:48:09
date last changed
2019-09-30 13:48:09
@misc{8979887,
  abstract     = {{The emerging green bond market is a novel research area with only a few studies being published in recent years. The increase in interest from issuers, investors, and academia shows the clear need for further investigation of the pricing dynamics affecting the green bond market. This study finds its theoretical foundation in the capital asset pricing model (CAPM), aiming to establish whether investor preferences toward nonpecuniary factors such as sustainability bring investor utility, challenging the original CAPM assumptions. If so, investors would demand lower financial returns as they find utility in the fact that green bonds cater to their sustainability preferences. We study the secondary green bond markets between 2014 and 2018 to investigate if there exists a negative yield premium when comparing a sample of green bonds with their non-green counterparts. The quantitative methodological approach includes OLS and issuer fixed effect regressions. Our differentiated sampling process allows us to construct the largest sample of green bonds compliant with the Green Bond Principles to date. We conclude that there exists a negative green bond premium of -4 to -5 basis points. Our findings also indicate that the green bond premium is not stable over time, with significantly negative yield premiums in 2017 and 2018. Our results remain robust after additional controls for potential liquidity differences, indicating strength in the statistical inferences.}},
  author       = {{Anderkrans, Rickard and Johannesson, Patrik}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Keen for Green - A Study of Pricing in the Secondary Green Bond Market}},
  year         = {{2019}},
}