Green Bond Premium: Evidence from the Corporate Bond Market

Abstract

This thesis investigates the existence of the green bond premium and its determinants through an analysis of 44 corporate green bonds and their matched non-green bonds listed on the Bloomberg Terminal over the period of 01/01/2016 – 28/02/2020. A Matching method is used to match green bonds with comparable conventional bonds, followed by a two-stage regression procedure. In the first stage, the study examines the presence of the green bond premium. A panel regression with fixed effects is performed to disentangle yield differential between green bonds and matched conventional peers into two main components: the liquidity difference measured by the difference in the bid-ask spread and the green bond premium. Empirical results indicate that green bonds are traded at lower -0.45 basis points yield compared to their conventional peers, confirming the presence of the green bond premium in the secondary corporate bond market. This result supports the argument that investors are willing to accept a lower return to acquire green bonds over their non-green counterparts. The second stage of the analysis aims to identify the factors influencing the green bond premium. To reach that goal, cross-sectional regressions are run for the estimated bond-specific green premium, with bond characteristics being the explanatory variables. The study discovers that the principal amount at issuance of green bonds negatively impacts the green bond premium. Meanwhile, the thesis could not find any significant influence of external reviews on the green bond premium. The empirical outcomes signal the high market demand for corporate green bonds. For the bond investors, benefits from enhanced transparency and engagement with the green bond issuers would outweigh the extra cost of acquiring green bonds instead of ordinary bonds. Building on this research, future studies could examine the green bond premium when the market matures with more available data and standardized regulations on green bonds are established.