Does the green bond premium exist in the secondary market? Evidence from Nordic countries

Abstract

Research background: The green bond market is growing every year. This market becomes an effective financing mechanism for climate change mitigation and adaptation. Even though approximately two-thirds of the research confirmed the existence of a green bond premium (GBP) in the secondary market, certain circumstances may deny it. Among them are comparable credit quality, market demand and supply dynamics, market liquidity, regulatory and policy support, investment preferences, etc. These circumstances are the main motivation for continuing the studies related to GBP, testing its existence for the issuers in Nordic countries. These countries have rather ambitious policies for environmental protection and low-carbon development, the presence of a transformative Nordic model for greening the economy, and issuers overall are positive towards the EU Green Bond Standard.

Purpose of the article:  This study aims to determine the GBP in the secondary market.

Methods: A matching method is used to determine the pairs of green and conventional bonds. A fixed-effects panel regression model is performed to control for the difference in liquidity between each green bond and its counterfactual to extract GBP. A Wilcoxon signed-rank test with continuity correction is applied to test the significance of GBP.

Findings & value added: The findings did not prove the existence of GBP, neither for the total sample nor for sub-samples by the issuer type. The study continued dividing the entire research period into three sub-periods (pre-COVID-19, COVID-19, and the Russian-Ukrainian war). However, the results did not change. The findings suggest that the GBP does not reflect market participants’ willingness to pay more for environmentally friendly investments, and it is not incorporated into pricing models by adjusting for risk, preference, and regulatory impact.

Keywords

green bond premium, yield spread, liquidity spread, secondary market

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