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Are Green Bonds More Liquid?
Do green and non-green bonds differ in liquidity? Our analysis of bid-ask spreads, as a measure of liquidity, isolated and quantified the effect of the bond’s label. We found little evidence the green label had a significant impact on liquidity.
What really drives the difference in green and non-green bonds’ transaction costs?
We looked at publicly traded investment-grade corporate bonds from May 2021 to November 2023.1 A naive comparison shows that green bonds had bid-ask spreads that were approximately 15 to 30 basis points tighter than those of non-green bonds. This approach, however, does not consider the effect on liquidity of other bond characteristics, which include credit spread, duration, issue size and time since issuance.2
Indeed, our analysis showed that green bonds’ tighter bid-ask spreads were mostly driven by the other bond characteristics and not the bonds’ green labels. We compared bonds with similar duration, credit spread, age and outstanding amount and found that EUR-denominated green bonds had marginally narrower bid-ask spreads; the difference was not statistically significant, however. In the case of USD bonds, the disparity was even less pronounced, with the difference oscillating around zero.
We conclude that EUR green bonds might be marginally more liquid, although the evidence was not strong. Conversely, green bonds in EUR or USD were not less liquid, dispelling the potential fear they are parked in buy-and-hold portfolios and thus become less liquid.
The estimated green impact on bond bid-ask spreads is not significant
1 Bonds are classified green or non-green based on their inclusion in or exclusion from the Bloomberg Barclays MSCI Global Green Bond Index. The analysis included investment-grade corporate bonds with remaining maturity of at least 12 months, an outstanding amount of at least USD 200 million and market-quoted bid-ask spreads. Distressed, callable, puttable, covered, convertible, subordinated and contingent-convertible bonds were excluded.
2 Tamas Nagy and Carlo Acerbi, “BLM2, a new kind of bond bid-ask spread model,” MSCI Technical Note, September 2016.
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