Unveiling the Liquidity Greenium: Exploring Patterns in the Liquidity of Green versus Conventional Bond

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Annalisa Molino, Lorenzo Prosperi, Lea Zicchino

The green bond market has grown significantly since the first green bond was issued in 2007, supported by the global commitments made in Paris in 2015 (Paris Climate Agreement). By combining standard bond features with a requirement to use the proceeds to finance green projects, green bonds are seen as an important tool for mobilising private capital to support the transition to a low-carbon economy. While most of the previous studies have focused on the existence of a yield premium, or 'greenium' (i.e. green bonds may offer a lower market return than conventional bonds due to their special feature of investing proceeds in green projects), this paper examines whether green bonds traded in the secondary market benefit from a ‘liquidity greenium’ (i.e. they are more liquid compared to conventional bonds).

Using a dataset of global bonds issued between 2009 and 2022, we show that green bonds issued by governments and supranationals are more liquid. However, this is not the case for corporate bonds, with the exception of those issued by companies operating in the energy sector. Moreover, a liquidity premium for corporate green bonds exists if there is an external verification or alignment with international standards, or a proven environmental reputation of the issuer. Results indicate that the liquidity premium of corporate green bonds has increased during periods of higher market illiquidity and after the recent monetary policy strategy of the ECB in favour of green assets. Finally, there is also evidence that the liquidity of conventional bonds improves for firms that announce the issuance of green bonds, but only in the case of multiple issues.

Annalisa Molino is Specialist at the Department of Financial Markets and Intermediaries Analysis at Prometeia. Lorenzo Prosperi is Principal at the Department of Financial Markets and Intermediaries Analysis at Prometeia. Lea Zicchino is Senior Partner and Head of the Department of Financial Markets and Intermediaries Analysis at Prometeia; and Adjunct Professor at Johns Hopkins University SAIS Europe.