Different Shades of Green: Estimating the Green Bond Premium using Natural Language Processing

47 Pages Posted: 24 Aug 2022 Last revised: 26 Aug 2022

See all articles by Emanuela Benincasa

Emanuela Benincasa

Swiss Finance Institute; University of Zurich - Department of Finance

Jonathan Fu

University of Zurich

Mrinal Mishra

University of Zurich - Department Finance; Swiss Finance Institute

Adityavardhan Paranjape

Zurich Insurance Group

Date Written: August 23, 2022

Abstract

We document the existence of a premium in the green bond market based on the greenness of green bonds. Using BERT, a natural language processing method for textual analysis, we develop a novel measure for bonds’ greenness and document that a 10 percent increase in the bond’s greenness corresponds to a decrease in annualized yield by between 4.86 to 8.71 basis points. In addition to greener bonds enjoying higher premiums, we find evidence that issuing a green bond has positive spillover effects on the pricing of subsequent conventional bonds’ issuance. Overall, our findings are consistent with firms relying on 'green' debt instruments to lower capital costs and raise cheaper financing.

Keywords: Green bonds, BERT model, Sustainable Finance, Bond premium

JEL Classification: G12, Q56

Suggested Citation

Benincasa, Emanuela and Benincasa, Emanuela and Fu, Jonathan and Mishra, Mrinal and Paranjape, Adityavardhan, Different Shades of Green: Estimating the Green Bond Premium using Natural Language Processing (August 23, 2022). Swiss Finance Institute Research Paper No. 22-64, 2022, Available at SSRN: https://ssrn.com/abstract=4198065 or http://dx.doi.org/10.2139/ssrn.4198065

Emanuela Benincasa (Contact Author)

University of Zurich - Department of Finance ( email )

Plattenstr 32
Zurich, 8032
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Jonathan Fu

University of Zurich ( email )

Plattenstrasse 32
Zürich, CH-8032
Switzerland

Mrinal Mishra

University of Zurich - Department Finance ( email )

Plattenstrasse
14
ZURICH, 8032
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Adityavardhan Paranjape

Zurich Insurance Group ( email )

P.O. Box
Mythenquai 2
Zürich, 8022
Switzerland

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