Credit spreads in the European green bond market: A daily analysis of the COVID‐19 pandemic impact

Antonella Francesca Cicchiello,Matteo Cotugno,Stefano Monferrà,Salvatore Perdichizzi

doi:10.1111/jifm.12150

Antonella Francesca Cicchiello, Matteo Cotugno + Show 2 more

Open Access

https://doi.org/10.1111/jifm.12150

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Abstract

AbstractFinancial crises and economic downturns provide a unique opportunity to investigate the behavior of investors and financial instruments and shed light in the market's anticipation of future economic growth. In view of the current crisis, we examine how the COVID‐19 pandemic affected the European green bond market. Using daily data from Thomson Reuter's Refinitiv, we conducted event studies on corporate credit spread changes over the period from January 1 to December 31, 2020. Our results reveal that green bonds' credit spreads increased significantly after the start of the coronavirus outbreak. However, as the fear of the pandemic eased in response to positive news about the vaccines, green bonds' credit spreads fell below conventional bonds. Overall, green bonds showed a higher risk exposure and lower resilience to distress while profiting during an upside. Our paper provides the first evidence about the impact of the COVID‐19 pandemic and the announcement of vaccines' effectiveness on the European corporate green bond market. Our results suggest several key points that are relevant to both investors and issuers under the unprecedented conditions created by the pandemic.

Highlights

While climate‐change‐related shocks appear inevitable, governments worldwide are trying to reduce the severity of the associated disruptions to the economy and financial markets through timely and stringent mitigating actions
The main purpose of this study is to investigate whether corporate green bonds were more resilient relative to conventional bonds in the rampant debt market sell‐off following the outbreak of COVID‐19
We examine the relation between the credit spreads of green bonds and the COVID‐19 pandemic by using European daily data from Thomson Reuter's Refinitiv and conducting a Difference‐in‐Difference (DID) analysis inside the period spanning from January 1 to December 31, 2020

Summary

| INTRODUCTION

While climate‐change‐related shocks appear inevitable, governments worldwide are trying to reduce the severity of the associated disruptions to the economy and financial markets through timely and stringent mitigating actions. Investors with a longer investment horizon prefer to hold high ESG firms and behave more patiently when incurring a loss (Starks et al, 2017) In line with this literature, we expect green bonds credit spreads to be more stable than conventional bonds during the market turmoil, reflecting a more stable and committed investor base. In response to the worsening COVID‐19 pandemic, the European Commission and the European Central Bank (ECB) took a series of monetary and fiscal policies designed to first mitigate and contain the economic repercussions of the coronavirus crisis, and to support the economic recovery (see Table 1) Among these interventions, the European Commission announced the “ Generation EU” (NG‐EU) project in July 2020—a €750 billion package funded through the issue of bonds on the financial markets by the European Commission on behalf of the EU (see Arce Hortigüela et al, 2020). The sample size varies across regression specifications because not all variables were available for all firm‐daily observations

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Findings

| CONCLUDING REMARKS