Are Green Bonds Special?

Abstract

Using intraday trading data from the largest electronic trading platform for corporate bonds in Europe from 2017-2023, this paper examines the secondary market trading behavior of green bonds. We find that green bonds exhibit higher liquidity, narrower spreads, and more muted reactions to market shocks than conventional bonds of the same issuer, but also find buy requests of green bonds to experience trading frictions due to high demand and limited supply. Our analysis also reveals positive spillover effects: issuers of green bonds experience improved liquidity, reduced trading costs, and lower price volatility also in their brown bonds suggesting positive effects on the overall information environment of the issuer. Green bonds react similarly to credit rating downgrades, while showing more negative price reactions to environmental controversies of the issuer consistent with green bonds attracting investors with non-pecuniary alongside financial investment motives. 

Keywords: Green bonds, brown bonds, market micro-structure, liquidity, trading costs, price reaction, sustainability