The pricing of green bonds and the determinants of the green bond premium in the Asia-Pacific and European markets

This study examines the sources of capital for sustainable development and investigates the existence of a green bond premium in both primary and secondary bond markets across the Asia-Pacific and European regions. Utilizing the robust Coarsened Exact Matching (CEM) method in conjunction with the Synthetic Minority Oversampling Technique (SMOTE), our analysis reveals a significant disparity in yields between green bonds and conventional bonds within the Asia-Pacific markets, indicating the existence of a green bond premium. In contrast, this distinction is not observed in Europe. These findings suggest that investors in the Asia-Pacific region display a willingness to accept lower yields in exchange for investing in environmentally sustainable assets, a behavior not similarly reflected among European investors. Our analysis reveals that green bonds within the Asia-Pacific region exhibit lower volatility and a correspondingly lower risk profile compared to conventional bonds, particularly in contrast to the European market. Furthermore, our findings suggest that several key factors contribute to a decrease in financing costs for green bonds, including issuance by financial sector entities, investment-grade ratings, local currency issuance, and the presence of external certification. These factors are linked to lower credit risk, enhanced issuer reputations, and the mitigation of foreign exchange risk, all of which play a significant role in reducing overall financing costs.