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Rethinking greenium: A quadratic function of yield spread

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  • Huang, Chih-Yueh
  • Dekker, David
  • Christopoulos, Dimitrios

Abstract

A greenium is the yield discount of a green bond compared to a similar non-green bond. Here we challenge implicit assumptions of a conventional estimator of greenium, which takes the difference between yield spreads of green and non-green bonds. We propose that the greenium should be estimated as a function of non-green bond yield spread. We find that the greenium increases for higher levels of non-green bond yield spread and that this occurs at an increasing rate. Further analysis indicates that at least partially this non-linearity accounts for the effects of credit spread and coupon rate differences.

Suggested Citation

  • Huang, Chih-Yueh & Dekker, David & Christopoulos, Dimitrios, 2023. "Rethinking greenium: A quadratic function of yield spread," Finance Research Letters, Elsevier, vol. 54(C).
    • Handle: RePEc:eee:finlet:v:54:y:2023:i:c:s1544612323000843
    DOI: 10.1016/j.frl.2023.103710
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    1. Malcolm Baker & Daniel Bergstresser & George Serafeim & Jeffrey Wurgler, 2018. "Financing the Response to Climate Change: The Pricing and Ownership of U.S. Green Bonds," NBER Working Papers 25194, National Bureau of Economic Research, Inc.
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    5. Simeth, Nagihan, 2022. "The value of external reviews in the secondary green bond market," Finance Research Letters, Elsevier, vol. 46(PA).
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    Cited by:

    1. Danilo Liberati & Giuseppe Marinelli, 2024. "Was Covid-19 a wake-up call on climate risks? Evidence from the greenium," Questioni di Economia e Finanza (Occasional Papers) 832, Bank of Italy, Economic Research and International Relations Area.
    2. Hu, Xin & Zhu, Bo & Lin, Renda & Li, Xiru & Zeng, Lidan & Zhou, Sitong, 2024. "How does greenness translate into greenium? Evidence from China's green bonds," Energy Economics, Elsevier, vol. 133(C).

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    More about this item

    Keywords

    Greenium; Green bond premium; Non-linear; Primary market; Green finance;
    All these keywords.

    JEL classification:

    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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