The Volatility of the “Green” Option-Adjusted Spread: Evidence before and during the Pandemic Period

Alessandra Ortolano,Eugenia Nissi

doi:10.3390/risks10030045

Alessandra Ortolano, Eugenia Nissi

Open Access

https://doi.org/10.3390/risks10030045

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Journal: Risks	Publication Date: Feb 22, 2022
Citations: 6	License type: CC BY 4.0

Affiliation: University of Chieti-Pescara

Abstract

The paper is an investigation on the impact of financial markets on the volatility of the green bonds credit risk component, measured by the option-adjusted spread/swap curve (OAS) before and during the pandemic period. To this purpose, after observing the dynamic joint correlations between all the variables, we adopt Exponential and Generalized AutoRegressive Conditional Heteroskedasticity models, putting the OAS as dependent variable. Our main results show that the conditional variance parameters are significant and persistent in both times, testifying the overall impact of the other markets on the OAS. In more detail, we highlight that the gamma in the two Exponential models is positive: so, the “green” credit risk volatility is more sensitive to positive shocks than to negative ones. With reference to the conditional mean, we note that if during the non-pandemic period only the stock market is significant, during the pandemic also conventional bonds and gold are impacting. To the best of our knowledge this is the first study that analyzes the specific credit risk component of the green bond yields: we deem our findings useful to observe the change of green bonds creditworthiness in a complex market context and interesting in terms of policy implications.

Highlights

Motivation Green bonds are deemed useful tools to implement the intertemporal burden sharing of climate mitigation across generations (Flaherty et al 2017; Orlov et al 2017; Andersen et al 2016; Sachs 2014) and to finance the development of the low-carbon transition (Monasterolo and Raberto 2018)
According to the spillovers between these instruments and financial markets, we study the impact of conventional bonds, stocks, oil, gold and cryptocurrencies on the “green” credit risk volatility; the analysis is conducted before and during the pandemic period
The dependent variable is represented by the option-adjusted spread/swap curve (OAS) of the Global Bloomberg Barclays MSCI Green Bond Index

Summary

Introduction

Motivation Green bonds are deemed useful tools to implement the intertemporal burden sharing of climate mitigation across generations (Flaherty et al 2017; Orlov et al 2017; Andersen et al 2016; Sachs 2014) and to finance the development of the low-carbon transition (Monasterolo and Raberto 2018). The attractiveness of these bonds is testified by the exponential growth that the market has recorded, even during the pandemic period. Even though the sustainable bond market has been characterized by a further split in its themes, on behalf to social, sustainable and pandemic bonds, the green segment has shown an increasing demand and better performances compared to plain vanilla debt instruments. Over the 2020 the market has had a discontinuous trend: if in the first quarter its volume has dropped lower than a half of 2019 (Climate Bonds Initiative 2020a), in the third quarter of 2020 green bonds have reached the highest volume of issuance for a third quarter, i.e., 69.4 bn USD (Climate Bonds Initiative 2020b). Looking to 2021, at the end of the third quarter, the total issuance has reached USD 354.2 bn and it has shown a growth of

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