The green sin: how exchange rate volatility and financial openness affect green premia
Center for Financial Studies Working Paper No. 715, 2023
36 Pages Posted: 20 Dec 2023
There are 2 versions of this paper
The green sin: how exchange rate volatility and financial openness affect green premia
The Green Sin: How Exchange Rate Volatility and Financial Openness Affect Green Premia
Date Written: December 10, 2023
Abstract
We propose a model with mean-variance foreign investors who exhibit a convex disutility associated to brown bond holdings. The model predicts that bond green premia should be smaller in economies with a closer financial account and highly volatile exchange rates. This happens because foreign intermediaries invest relatively less in such economies, and this lowers the marginal disutility of investing in polluting activities. We find strong empirical evidence in favor of this hypothesis using a global bond market dataset. Exchange rate volatility and financial account openness are thus able to explain the higher financing costs of green projects in emerging markets relative to advanced economies, especially when green bonds are denominated in local currency: a disadvantage that we can call the “green sin” of emerging economies.
Keywords: Green bonds; Greenium; Exchange rate volatility; Financial openness; Original sin
JEL Classification: F21, F30, F31, G11, G12
Suggested Citation: Suggested Citation