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Stochastic behavior of green bond premiums

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  • Kanamura, Takashi

Abstract

This paper aims to examine the stochastic behavior of green bond premiums that can characterize the benefits of green bonds. We propose a novel affine model of green bond pricing with mean-reverting interest rates and green bond premiums and a new model parameter estimation method using conventional and green bond prices to capture the stochastic behavior. Then, the model parameter estimation results demonstrate mean-reverting stochastic behavior for conventional bond yield and green bond premium using the US and EU green bond indices for Corporate and three corporate bond indices for intermediate, total, and long-term periods of the Bloomberg Fixed Income Indices from November 3, 2014 to December 11, 2020. Comparative statics using simulated green bond premiums show that green bond premiums orient toward negative values in nature. Moreover, the stochastic behavior of green bond premiums demonstrates that the greenness of green bonds has a downward effect on interest rates in COVID-19 and has a mitigating impact on liquidity risk in corporate bond markets. These results confirm the benefits of green bonds. Finally, the discussions secure the validity of the green bond pricing model by conducting econometric analyses of the regime-switching model, principal component analyses, and the GARCH (1,1) model.

Suggested Citation

  • Kanamura, Takashi, 2025. "Stochastic behavior of green bond premiums," International Review of Financial Analysis, Elsevier, vol. 97(C).
    • Handle: RePEc:eee:finana:v:97:y:2025:i:c:s1057521924007683
    DOI: 10.1016/j.irfa.2024.103836
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    More about this item

    Keywords

    Green bond; Affine model; Kalman filter; Green bond premium; Mean-reversion; Liquidity risk premium;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • 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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