Performance Evaluation of Green and Conventional Bonds by Common Factor Models

Abstract

Together with increased sustainable awareness, companies and municipalities all over the world seek funds to conduct Green projects. The rapid growth of interest in sustainability has led to an additional investment opportunity for investors. However, this relatively new topic lacks sufficiently extensive studies concerning Green Bonds performance and investors may therefore struggle to decide whether to include Green Bonds in the portfolio or not. The aim of this thesis was to investigate the performance of Green Bonds compared to conventional bonds using common factor models. Starting off with the CAPM, the model is later expanded with additional factors such as the Fama-French three-factor model, the bond specific Term and Def factors and ultimately ending up with a six-factor model. All models possess relatively high explanatory power and although no statistical significance could be proven, the models suggest that there is no difference in performance between Green- and conventional bonds. Hence, investors are advised to invest in Green Bonds, which possibly entails a positive sustainable image, while the expected return may remain unchanged.