GREEN INVESTOR PREFERENCES DURING TIMES OF MARKET UNCERTAINTY

Abstract

This thesis investigates the presence of a green bond premium, or Greenium, and how green investors react to market volatility compared to traditional investors. Using a matched pair analysis of green and non-green, plain vanilla fixed coupon bonds, from the EU and US markets. Our findings reveal a significant Greenium in the EU, averaging 51.4bps, but no Greenium in the US. This disparity may be due to differences in regulatory frameworks, investor demand, and market maturity between the regions.

Further analysis indicates that during periods of increased market volatility, such as the Russian invasion of Ukraine, the Greenium decreased by 36bps in the EU. This suggests that green bonds become less attractive during high volatility. Additionally, we find that the volatility of green bonds is higher in the EU than in the US, though this could be attributed to differences in regional market volatility rather than the green bond market specifically.

Our liquidity analysis shows that green bonds have a tighter BID-ASK spread than conventional bonds, indicating higher liquidity. This is more pronounced in the US, where green bonds have a 1bp tighter spread, compared to a 0.45bps tighter spread in the EU. However, the Greenium and liquidity relationship is complex and influenced by regional factors such as interest rates and market conditions.

While we only find evidence for a Greenium in the EU market, green bonds in both regions show varying responses to market volatility and liquidity conditions, influenced by broader market dynamics and investor preferences.