Risks and returns of Green Bonds

Abstract

This study examines the risks and returns of Green Bond (labeled as "Green" by issuers) in relation to other traditional bonds (S&P500 bond, Developed bond and EU bond) and stock (S&P500 stock) over a period of December 2008 to December 2016. It deals with investigating the relationship between bonds and stocks. In doing so, the source of the data set for this study is Standard and Poor’s Financial Services LLC (S&P) Dow Jones Indices and the Federal Reserve Economic Data (FRED). S&P500 bond and stock are used as market benchmarks. The study employs the variance risk measure, Capital Asset Pricing Model and Autoregressive Distributive Lag Model in the analysis. Green Bond grows overtime next to S&P500 bond compared to bond market. However, stocks are growing faster and yields higher return than bonds. The finding of the study shows that Green Bond has positively and statistically significant relationship with S&P500 bond and S&P500 stocks in both CAPM and ARDL models. When corporate bonds and stocks increased by 100%, this leads Green Bond to increase by 91% and 45%, respectively in CAPM. The ARDL model confirms this finding that Green Bond grows by 98% in relation to bond and 43% in relation to stock. However, the systematic risk of Green Bond and the market (S&P500 bond) are equally volatile in CAPM and ARDL models unlike the mean-variance measure of risk. On the other hand, there is a statistically significant difference on the systematic risk of Green Bond and S&P500 stock. Thus, Green Bond has less systematic risk and is less volatile than S&P500 stock.