Green Bonds vs Conventional Bonds : Market efficiency test on green bond funds vs conventional bond funds when faced with external shocks causing stress

Full text


Green bonds vs



Market efficiency test on green bond funds vs

conventional bond funds when faced with external

shocks causing stress


PROGRAMME OF STUDY: Civilekonom AUTHOR: Sebastian Berg & Alexander Sönnerhed JÖNKÖPING May 2021


Bachelor Thesis in Business Administration and


Title: Green bonds vs Conventional bonds Authors: Sebastian Berg and Alexander Sönnerhed Tutor: Fredrik Karlsson

Date: May 24, 2021

Key terms: Bond funds, Green bonds, Efficient Market Hypothesis, Hypothesis testing


This thesis investigates the effects of environmental and economic disasters on green bond funds and conventional bond funds during the years 2016-2020. The research emphasizes how a saver could act when comparing green bond funds and conventional bond funds for investing purposes. Based on previous research, there are indications that green bonds and conventional bonds differ in pricing despite having the same economic quality. This research investigates bond funds rather than singular bonds. The tests in this study are quantitative based on hypothetico-deductive approach. Based on hypothesis testing through the Mann-Whitney-U test, green bond funds and conventional bond funds act similarly during events of stress, and there is no statistically significant evidence which proves that investing solely in either of the two groups is better than the other. In accordance to the Efficient Market Hypothesis, this thesis suggests that the bond funds act similarly because in essence they are the same financial instrument and act according to their ratings and qualities. From a saver’s perspective, it is therefore better to look at the quality and rating of a fund rather than what category of fund it is.



1 Introduction ... 1

1.1 Background ... 1

1.2 Problematization ... 3

1.3 Research Question & Purpose... 7

1.4 Definitions... 7

2 Methodological approach ... 8

2.1 Method of the study ... 8

2.2 Hypothetico-deductive research ... 9

2.3 Secondary data ... 10

3 Literature review ... 10

3.1 Core concepts ... 10

3.2 Previous research in pricing of bonds ... 16

3.3 Gaps in research and formulation of hypotheses ... 17

4 Implementation of Methodological Approach ... 18

4.1 Hypothesis testing ... 23

5 Results ... 25

5.1 Results from hypothesis testing ... 25

5.1.1 Event 1 – Brexit referendum, economic event ... 25

5.1.2 Event 2 – US presidential election, 2016 ... 26

5.1.3 Event 3 – US-China trade war ... 27

5.1.4 Event 4 – Australian wildfires ... 28

5.1.5 Event 5 – Covid-19 ... 29

5.2 Values found from data ... 30

5.3 Interpretation of the hypotheses ... 31

6 Conclusion ... 34

6.1 Future research ... 35

7 References ... 37



1 Introduction

This thesis aims to add further knowledge to the fast developing area of green bond research. Since the green bond market is relatively new, existing research in the field is limited. Green bonds are similar to conventional bonds with the difference that their proceeds fund

sustainable initiatives. The green bond market has grown significantly in size since the early 2010s; however, it is still relatively small compared to the conventional bond market. Previous research indicates that there are differences in pricing of green bonds compared to conventional bonds. Our thesis builds further on that theory and explores different scenarios in which green bond funds and conventional bond funds should theoretically react similarly. We will compare how green bond funds and conventional bond funds align with the

predictions of an existing theory. Furthermore, we include specific events that should affect a fund’s price in addition to comparing them on an eventless basis.

1.1 Background

Throughout the 21st century, climate change has been considered one of the largest contemporary threats to humanity. Extreme weather, rising sea levels, ice melting, loss of biodiversity and poor harvests are just a few examples of the effects from global warming according to the WWF (Världsnaturfonden WWF, 2021). Through newspapers and other forms of media, we are reminded of the importance of the effects of global warming and the dire need to change the current situation. Many individuals, organizations and governments have begun to take responsibility for creating a more sustainable world. One important example of actions that have been taken to end the trend of negative climate change is the Paris agreement adopted by 196 parties in 2015. The goal with this agreement is to limit the increase of global warming below 2 degrees Celsius. In order to achieve this goal by the year 2050, countries should try to reach the peak of global gas emissions as soon as possible. The Paris agreement is special since it brings all countries together in the battle against climate change. All countries contribute with ideas and actions that decrease gas emissions, and the more developed countries take a larger responsibility when it comes to providing financial assistance to the underdeveloped countries that suffer from having fewer economic resources (Paris Agreement United Nations Treaty Collection, 2015).

Even though much has been done in the last couple of years, the Intergovernmental Panel on Climate Change (IPCC) argues that further significant changes are still necessary. The IPCC has observed the changes and their cause in order to explain future risks and how to adapt for a better future. The issue of climate change and global warming is estimated to be more costly in the future, thus the emphasis on acting now (Intergovernmental Panel on Climate Change, 2015).

In view of the increasingly intense environmental debate, both organizations and



risen remarkably: companies, organizations and governments are developing new projects that aim to make improvements for the environment and fight the issue of global warming. These projects need to be funded, and one of the means to funding for institutions is issuing bonds. When the issued bonds serve a purpose of attaining a sustainable environment, they are commonly referred to as “green bonds”. When it comes to sustainable finance, according to Maltais and Nykvist (2020) the innovation and development of the green bonds are one of the most outstanding innovations of financial investments in the last decade. Green bonds are inherently similar to conventional bonds in the way they are structured and work. The main difference between these two is that green bonds have a clause to finance only green projects in that way serving their purpose of creating a better sustainable environment. Another important difference according to Maltais and Nykvist (2020) is that when investing in a green bond, the investor usually has recourse to the issuer's balance sheet which means that there will be no exposure to the financial risks of the specific projects.

The concept of green bonds is fairly new, thus we aim to explain green bonds in the following part starting by explaining conventional bonds to gain an overview of the

similarities and differences between the two. The bond market in general is a market where an investor lends an amount of money to the issuer in order to receive returns based on the rate of the bond and the size of the investment. It is important to understand that the investor lets the money rest in return for the yield the bond will bring. For conventional bonds, the lent money is reallocated into the company which uses the money as they see fit. However, for green bonds, lending the money has a specific purpose. The investment goes to

environmental projects instead of into the company itself. As of yet, there is comparably less literature about green bonds compared to conventional bonds.

A bond is “an interest-bearing instrument issued by governments, corporations and other established organizations'' (Gibson, N. 2013). Further, a bond is also considered as evidence of debt on which the issuer usually promises to pay interest in the form of coupon payments. These payments are usually paid in regular intervals. Upon reaching maturity, a

predetermined date in the future, the issuer is supposed to pay back the initial loan. Unlike buying stock in a company and becoming owner of company equity, when you buy a corporate bond you instead become a creditor to the company (2013). Issuing bonds can therefore be described as a substitute to a bank loan with the difference that the bond is actively traded on the stock exchange. Furthermore, the exchange market is defined by Berk and Demarzo (2017) as an organized market on which shares of corporations are traded. In this study, we refer to this as the marketplace for our investigated bond funds.

The environmental issue has been highly relevant for a long time, yet no later than 2007 was the year when the market for green bonds launched. The first bond that was issued was an AAA-rated bond by the European Investment Bank (EIB) and the World bank. Successively, new types of green bonds entered the market: the first corporate green bond, the first green municipality bond and the first green city bond. Accordingly, strong growth in the green bond market has been emerging. In 2014, USD 37 billion was issued in the green bond market, in



2018 that number increased to USD 167.3 billion which is more than four times the amount in 2014 (Climate Bonds Initiative, 2021).

Another interesting aspect that can be added to this research is the aspect of saving. Since buying bonds is an expensive investment, considering the price of a bond is usually approximately one million SEK, most private investors looking to save money will not be able to purchase a bond. The private investor might, due to the high prices, not be able to invest in single bonds, but they can instead invest in an alternative instrument, namely bond funds. A bond fund functions similarly to an ordinary bond. This is because, in essence, a bond fund is a collection of multiple bonds. Bond funds are managed by an organization or institution that determines the risk of the bond fund and calculates an average yield with the goal of maintaining a certain risk level and attaining the maximum yield. The private investor can then buy smaller shares in this fund if they believe that the fund is managed in a way that will generate profit for the investor. As mentioned earlier, there are both conventional bonds and green bonds issued on the market with the main difference that green bonds finance sustainability projects. In the same way, there are also green bond funds which work like ordinary bond funds except that they solely invest in green bonds.

The Swedish financial market is established in a way that allows for savings to be made for investors, while the government and other bodies borrow money. This is based on

transparency and efficiency (Wissén, P. 2014). Transparency and efficiency make it easier for private investors to find information if they seek it and can make the choice of investing in a green bond fund easier as they do not have to blindly trust the fund manager in case they want information themselves.

One could argue that the green bond market is very small, but the fact that the market for green bonds is growing rapidly is undeniable. Despite the rapid growth of the market, there has been relatively little research conducted in the area. Reasoning that more research needs to be made, we will try to complement existing research in the area through our thesis. Hopefully, we will also complement with new relevant insights and provide new problems and suggestions for further research that will encourage others to continue to extend the already existing research in this relatively new and unexplored field.

1.2 Problematization

In this chapter, we use previous studies to reach a problematization that will be researched in the analysis chapter. We begin by briefly explaining the different concepts that lead to our problematization.

Previous studies indicate that some green bonds and conventional bonds are priced differently where the price of green bonds exceeds the price of a conventional bond of the same quality (Maltais, A. & Nykvist, B. 2020). According to the Efficient Market Hypothesis, the same quality bonds should have the same price. Otherwise, an arbitrage opportunity—investors exploit the returns of a security that are larger than what is justified by the characteristics of



that security (Mishkin, F. 2013)—presents itself. Still, there is no evidence of arbitrage when comparing conventional bonds to green bonds. This suggests that the Efficient Market Hypothesis is able to spot differences beyond the structure of a bond and could be an explanation for a potential price difference.

As mentioned, green bonds have only recently gained popularity in practice. Theory has yet to decide on one singular definition of a green bond, thus we use the following part to argue for our definition.

Our area of research aims to complement and further develop studies within the green bond area in tandem to conventional bonds using our method to investigate if there are intrinsic differences which may explain a pricing difference. Our thesis complements a study by Hachenberg and Schiereck (2018). The authors have compared conventional bonds, in other words any bonds traded on an exchange market, to green bonds and how they are priced. According to the efficient market hypothesis, given that consumers have access to all information, and everything is equal, there should be no price difference. In other words, a market is efficient when a bond is accurately priced in tandem to existing information, and new information will not change the price (Sewell, M. 2011). However, Hachenberg and Schiereck have found a difference between A-rated and BBB-rated bonds in terms of price. Hachenberg and Schiereck (2018) have managed to reach a conclusion regarding common bonds, but not regarding bonds of higher quality. Despite this, they have not managed to prove that higher-rated bonds are priced differently. This could indicate that conventional bonds and green bonds are in fact not the same regardless of the elements that make up the basics of a bond. It could also be the cause of lower-rated bonds being less reliable, and therefore the price difference occurs due to the risk related. This thesis researches green bond funds and conventional bond funds to minimize bond-specific elements that cause volatility in price but are near impossible to identify. Bond funds are theoretically better when

comparing the nature of bonds as they minimize the risk of bond elements affecting its price.

Furthermore, this area lacks research. However, the existence of studies indicates that there is an interest in acquiring knowledge about green bonds and how they function. We cannot say with certainty, as of this moment, if any factors regarding green bonds unrelated to their intended function cause a price difference. A certain demand for green bonds might exist due to companies that purchase them for greenwashing or tax relief. Because of how green bonds work, their customer base also differs from that of conventional bonds. Based on what we have presented, it is therefore interesting to investigate if green bonds and conventional bonds differ to allow future researchers to find out more about why they do so.

Green bonds are, as stated above, similar to regular bonds, with one major difference. Their investors pay to receive a regular dividend; however, the proceeds of green bonds go to green investment (Maltais, A. & Nykvist, B. 2020). These bonds are only used to finance green investments, for example improving infrastructure. To understand what green investments are, it has to be understood that the term “green” lacks a consensus definition (Kaminker, S. 2012). Green can be referred to specific goods that are beneficial for the environment, society



or the economy in a way that does not harm any of the other two aspects. It can also mean that a company is less harmful than another. In this case it is referred to as “greener”. For this thesis, the threshold for “green” is satisfied by the bond being recognized as “green” by the market. This study will therefore only include green bond funds that are labeled as green.

Because there is no consensus on the definition, researching the subject can be difficult since people use the same term with different meanings. However, we argue that the most effective way to define green bonds is to not use the word “greener”, as it is interpretative and a short-term definition that may change as the green bond market develops. For this reason, all green bond funds that are short-term are not included as they may contain green bonds not of interest.

Within green bonds, there is a niche market of climate bonds which require a certificate from the Climate Bond Initiative (CBI). Differentiation between green bonds and climate bonds has been ignored in this thesis since they are not in general differentiated in green bond funds. Furthermore, both green and climate bonds serve the same purpose of improving environmental issues with their proceeds. This results in an overview of multiple bonds, and climate bonds are a niche part. Differentiating between green bonds and climate bonds would therefore be unnecessary. However, the authors recognize that there are some climate bonds which may slightly change our results in our calculations. It is also possible, however, that climate bonds react similarly to green bonds, and thus have no difference.

It is important to note that some consumers choose to buy green bonds because it can

improve their reputation. According to Laufer (2003) greenwashing is recognized as a sort of corporate disinformation. Greenwashing is defined as misleading consumers about the environmental practices of a firm. It is dangerous since it is difficult to counteract and can erode faith and trust from consumers in green products (Delmas, MA & Burbano, VC. 2011). It is impossible to determine which customers are greenwashing, and we will therefore exempt this limitation. This can impact our result since it can lead to a slight price inelasticity. However, one can argue that in the end both greenwashing and benign investment in green bonds result in the same goal, and it is therefore not justifiable to distinguish between the two. Furthermore, the effect of greenwashing should be limited due to our methodological choice of using funds even though it might slightly affect the price of individual green bonds.

A similar reason can be named for tax relief (Hachenberg, B. & Schiereck, D. 2018). Since green bonds can provide a certain tax deduction for investors, this may be reason enough for certain investors to purchase green bonds despite a price increase (Agliardi, E., & Agliardi, R. 2019). Therefore, this limitation is used to describe that some prices may not vary as much. However, as with greenwashing, it cannot be proved that a company is solely using green bonds for tax relief. Therefore, tax relief will not be investigated for each purchase of green bonds.



During the year 2020, the Covid-19 pandemic started to spread around the world. Many businesses and entire industries have suffered great economic losses, and many people have lost their lives due to the pandemic, while others, on the other hand, have adjusted to the situation and managed to benefit from this virus outbreak. The world is still adjusting to the pandemic, and the final effects of the pandemic are still largely uncertain. This leads to the important aspect of how to handle these situations of external shocks creating stress and how savers behave from a saving perspective. Will there be differences between the different financial instruments, how will stressful events develop and how will the different financial instruments on the market behave during and after these specific events?

An event that has had a more tangible negative effect on the environment is the Australian wildfires that spread uncontrollably around the continent during 2019 causing people to leave their homes and millions of animals to die. Such an event also creates economic stress: people losing their homes, people unable to go to work, the cost of rebuilding and of course the loss of natural resources. This can potentially lead to an increase in the environmental awareness, and the investor might, due to this rising environmental issue, to a larger extent prefer the greener investment and hold tighter to that one compared to the conventional investment. Further, the market of green instruments might increase due to these events of natural disasters.

For an individual attempting to save money through investing in bond funds, a rational choice is to choose the fund with the lowest risk, lowest cost of investing and with the highest yield. None of these factors are affected by the morality issue of investing in bond funds that are generally seen as detrimental, such as oil or weapon factorization. In tandem with the market for green bonds growing, it begs the question if there is a tradeoff between investing in funds that have a net positive effect or if these funds are more effective in terms of yield as well. The term greenium is used to describe the notion that green bonds of the same quality are more expensive than conventional bonds. For a saver, this would indicate that green bond funds could be more expensive than conventional bond funds for the same return making it a less attractive investment from a financial perspective.

Furthermore, our choice of investigation method is interesting as it shows the same financial instrument, bond funds, in two extreme situations. By measuring how green and conventional bond funds react to the same situation, we should be able to distinguish if they are

intrinsically different despite being the same financial instrument. Were they to be the exact same instrument, they should react in the exact same way based on the Efficient Market Hypothesis. However, green bond funds and conventional bond funds have different goals in terms of the investments made, the result may differ. If there is a difference, it should show when exploited to the extreme stress factors previously mentioned. This is important to investigate in order for a saver to know if they are investing in a completely different product despite investing in the same category of financial instruments, namely funds.

In the case that we reach the conclusion that green bond funds react differently to stressful events when compared to conventional bond funds, this thesis further reinforces other



researchers’ previous statements, namely that green bonds and conventional bonds are priced differently. Furthermore, since our methodology minimizes the risk of bond-specific elements affecting the price, one can speculate that the price difference is caused by an intrinsic

difference between green bonds and conventional bonds. We argue that this does not make our study less comparable, rather it gives this research area an overview of the nature of green bonds. Researchers should be able to use this information to construct new research that may be more niched or detailed. For example, it could be questionable to compare green bonds to conventional bonds as they are inherently used for different outcomes. Some research indicates that green bonds and conventional bonds are different in how they act on the market and the pricing behind them, which would indicate that they should be treated as different goods instead of the same financial instrument. However, if green bonds and conventional bonds display no inherent difference in market reaction, they are correctly treated as the same type of financial debt products.

1.3 Research Question & Purpose

In this section, we explain the purpose of the study and present the research question.

Analyzing if there is a significant difference between green bond funds and conventional bond funds requires developing a theoretical understanding. This can be done by the interpretation of calculations based on bond funds when interacting with the market; any significant difference would be a deviation from the Efficient Market Hypothesis. By understanding how green bond funds interact with the EMH, adjustments can be made to develop a new EMH if needed. Based on the EMH and theoretical prediction that no significant difference should be found between green bond funds and conventional bond funds, we formulate the research question “What is the practical applicability of the Efficient Market Hypothesis for green bond funds and conventional bond funds when faced with economic or environmental stress?” The idea of this thesis is to test the EMH and whether prices and volatility are affected differently when faced with external stress depending type of bond fund.

1.4 Definitions

In this section, we define keywords that are otherwise more difficult to explain in the text and that some readers may not know prior to reading.

Bond duration is one way to measure the timing of a bond. Typically, a bond’s timing is measured by term to maturity. However, bond rating measures all payments during the holding of a bond, including its face value, in present value. A bond’s duration, D, is calculated as 𝐷 =∑ 𝐶𝑡(𝑡) (1+𝑟)𝑡 𝑛 𝑡=1 ∑ 𝐶𝑡 (1+𝑟)𝑡 𝑛 𝑡=1



where 𝐶𝑡= the interest or principal payment in year t, (t) = the length of time to the interest or principal payment, n = the length of time to final maturity and r = the yield to maturity (Frank, R. & Rupinder, S. 1980). Duration is therefore a weighted average of the term to maturity with all weights being measured in present value.

Volatility is defined by Berk and Demarzo (2017) as a measurement of the total risk for a stock or bond. In other words, it includes both risks related only to the firm, such as a lawsuit draining money, and risks relating to external factors, such as the risk of an earthquake occurring.

Bond ratings are given to bonds based on financial information, such as accounting (Ziebart, D. & Reiter, S., 1992). They can be valuable for finding information on how bond yields and prices react to a change in bond ratings (Kliger, D. & Sarig, O. 2000). Bond ratings are a way to assess the creditworthiness of a bond after which a bond is assigned a letter grade such as AAA. This grade has a negative correlation to the interest rate of the bond (Chen, J. 2021). A higher grade will have a lower interest rate, indicating that it is a safer investment.

A person who decides to invest in bond funds assume that the fund manager is a rational investor. This means that the fund manager can make educated assumptions based on their knowledge and experience thereby relieving the person who wants to save money of

educating themselves. In this thesis, all investors are assumed to be rational investors and will henceforth be referred to as “investors”.

2 Methodological approach

In this chapter, an explanation of the methodology that the thesis has undertaken will be presented. The first part explains the quantitative use of data. The second part explains the classification of this thesis. Finally, the third part explains the classification of the data used in this thesis. Credibility and relevance of the research methods are also considered and discussed.

2.1 Method of the study

When considering a scientific field of research, there are two common methods of collecting data: the qualitative and quantitative research methods. The basic distinction between these two is that the qualitative research method deals with opinions, and the quantitative deals with numbers. In the case of this thesis, where a comparison will be made in price and volatility between conventional bond funds and green bond funds, one way of investigating the issue and conducting research could be in the form of in-depth interviews with financial analysts to gain their experience on how green bonds are behaving in comparison to

conventional bonds. Qualitative data is collected through opinions, for example interviews. Although, our belief is that the most effective way to investigate the research question is to create arguments that support or oppose the hypothesis by data collection in the form of



numbers. The hypotheses are most suitably proven or disproven through calculations from raw data rather than opinions. Therefore, a quantitative method will be used in this thesis (Hyde, K. 2000).

Hyde (2000) makes an important distinction between quantitative and qualitative research methods. He argues that the quantitative approach tries to describe the more general aspects of the population looking at the population as a whole and then making general assumptions. In this method, details from individual elements in the tested sample, since they are not of interest, are ignored. The quantitative approach can more easily examine a sample that covers a larger part of the population of interest in comparison to the qualitative method. After measuring the characteristics of the sample one can, from the gathered information, make assumptions about the entire population. Hyde also argues that since the role of quantitative research is general assumptions and not characteristics from individual elements in the sample, it might be the case that not a single element equals the generalized results from the population. On the other hand, when it comes to qualitative methods, results from each element are of interest; the researcher tries to identify as many details as possible about each element in the sample. Using this method, the sample size is usually much smaller which lets the researcher study each element in more depth to gain a broader understanding of the issue. Patton (1991) states that this method aims at a smaller sample but provides a large amount of detailed data. Therefore, another argument for using the quantitative method in this thesis is that we aim to cover a large population and detailed information in individual cases is not of as high interest as the general opinion.

2.2 Hypothetico-deductive research

When considering different ways of approaching research, one has to distinguish the differences between inductive and deductive research methods. According to (Casula, R, 2020), the key to deductive research is theory. Further, according to Woiceshyn and Daellenbach (2018), deductive research starts with an existing theoretical base or with a method of hypothesis testing. The researcher selects a theory, defines what parts of the theory they would like to examine and then creates hypotheses. The next step is to identify and collect data and then apply a statistical method to test if the hypothesis holds true. In the last step, when the hypothesis has been tested, the researcher should discuss whether the findings from the tested hypotheses support or oppose the research question.

Hyde (2000) describes these approaches in a similar way and states that inductive and deductive reasoning are the two general ways of reasoning that can result in acquainting new knowledge. He argues that inductive reasoning is a process where you build a new theory, while deductive reasoning on the other hand is a theory testing process which starts with a predetermined theory that is tested to see whether the theory holds true or not.

Locke (2007) argues that research can be developed from an already existing theory that will be further investigated by using hypotheses. The researcher then makes deductions from the original theory and creates tests to see if the hypothesis holds true or not. Lastly, the



researcher analyses the findings and creates arguments to revise the existing theory. Locke calls this concept of conducting a research “hypothetico-deductive research”, and since this method goes in line with this research, the same term will be used for our thesis.

2.3 Secondary data

Secondary data provides first-hand information of an event. Collecting secondary data means collecting already existing information that has been gathered by, for example, analyzing, interpreting or evaluating primary sources. Principally, the information is readily available on a data source. Examples of secondary data are journals, articles, textbooks or newspapers. After the secondary data has been collected, it will then be adjusted to the specific topic of interest in order to be used to create arguments that are in the scope of the project. In this thesis, we collect the data from external sources, namely Financial Times, a database displaying the conditions of the funds for a given time period. Since we have not created or measured the data, rather opting to use existing data from an external source, the data

collecting method in this thesis is considered as secondary. The secondary data that has been collected in this thesis is in the form of numbers and can be used to calculate the percentage difference in the price of a bond thereby also measuring the risk of a bond indirectly through its volatility. This data provides information in the form of numbers which can later be used for statistical methods.

Since this thesis aims to make a comparison in volatility and price between conventional bond funds and green bond funds in times of different catastrophic events, the main method that has been used is collection of secondary data.

3 Literature review

In this section, we will begin by giving a detailed description about core concepts that were briefly mentioned in the background and problematization. We will then move on to describe related research, further investigating what is assumed about green bonds as well as how bonds function and the pricing behind bonds and bond funds. Conclusively, we will state our hypotheses based on previous research and the context of our thesis.

3.1 Core concepts

The concept of the financial market is to allow governmental bodies, companies and other institutions to borrow money which is then used to finance their projects. The projects could be internal, such as improving the state of the company, or external as when investing in projects not related to the company itself. In return, the lender, an investor, will receive a certain rate for their lent amount. In general, a financial market is of importance to the overall economy of a society as long as the market is organized correctly. In Sweden, the market has been structured to focus on adequate transparency and efficiency since the 1980s. When the market is structured in this way, it becomes relatively easy to invest in funds, for example, as the general public can invest cheaply and sell off investments knowing what instruments they



are trading. A point is made that every individual should have access to the price and maturity of potential investments. The importance of cheap and easy transactions is of great relevance to our thesis as it establishes a healthier market for savings. Investors can choose a relevant fund and invest a suitable amount of money in order to gain return or sell it at a higher net value price in the future (Wissén, P. 2014).

A mutual fund is operated by an investment company with the purpose to raise money for its shareholders. Mutual funds can, for example, invest in stocks, bonds, options or currencies. Funds invest in several financial instruments and therefore provide investors with the advantage of diversification. Since these funds are professionally managed, a management fee is charged for these services which is usually between 0.5% and 2% of total assets per year. Fund shares can be sold on demand at net asset value by the shareholder on the financial market. These financial instruments will generate profit or losses which are equally shared between the fund shareholders. Mutual funds can be managed in different ways, some aim for capital appreciation by investing more aggressively in riskier financial instruments, while others use a more conservative approach trying to generate income. Investors should reflect on risk tolerance and the future forecast of the economy before deciding which fund is considered most suitable. Possible changes in interest rate and the current state of the stock and bond markets are volatile which makes timing crucial when investing in a fund.

(Downes, J. & Goodman, J. E. 2018). Mutual funds allow savers who otherwise cannot afford to purchase a bond to still invest in the category of the bond for a lower price.

A specific type of mutual fund is a bond mutual fund which will be referred to as bond funds in this thesis. This kind of bond fund can invest in a particular kind of bonds, for example, corporate, government, municipal or convertible bonds, but it can also invest in some or all of these different bonds. The purpose of this instrument is to create income for its shareholders and, depending on the interest rate, the fund capital will rise or decrease. If the interest rate falls (or rises) the capital will increase (or decrease). A significant difference between the bond fund and the single bonds in these funds is that while the single bond has a maturity date where the bond expires, the fund does not have a maturity date. This is because the fund manager changes the content of the fund to sustain and uphold its rank and quality. Thus, when a bond within the bond fund matures, the fund will simply reinvest the capital in another bond that is considered suitable for the fund (2018).

An important aspect to consider when distinguishing green bond funds and ordinary bond funds is that while green bond funds must solely invest in green bonds, the conventional bond fund can invest in both conventional bonds and green bonds. Therefore, if the managers of the conventional bond fund believe that a green bond will generate a higher interest than a conventional bond, they are more likely to choose the green bond as a security that is

included in the bond fund. If the development of the conventional bond funds moves towards a larger amount of investments in green bonds, this would be a good indication that green bonds in fact are priced more favorably and will generate a higher interest. On the other hand, the bond funds managers can also use this potential movement towards green bonds as a way of greenwashing and use it to attract more investors. Furthermore, green investments are



situational in terms of payoff. There are green companies that have managed to establish a competitive advantage and create a situation where both they and the environment benefit from their products or services. Yet, there are still conventional bond funds and companies that do not focus on being green. This reinforces that green investments or green companies are not inherently more profitable than conventional ones, rather they are situational. Given the right situation, a green bond is more profitable; however, this argument can be used regarding any bond type. This explains why fund managers of conventional bond funds may not include green bonds. The situational nature of green investments reinforces that green bond funds and conventional funds may be different, despite both being the same financial instrument (Orsato, R. 2009).

If there are differences between green bond funds and conventional bond funds, the question still remains why they are different. This can be explained using the Efficient Market


To fully understand the Efficient Market Hypothesis (EMH), we first need to understand what arbitrage is, and how it affects the EMH. An arbitrage opportunity presents itself when investors find a security that they can exploit for profit directly. Suppose that security A has an expected annual return of 10%. The investor knows that the current price of stock A is lower than the optimal forecast of tomorrow’s price. In this case, the return of stock A will therefore be higher than the average return based on the equilibrium rate of 10%. Investors will purchase a larger amount of security A than they otherwise would until that opportunity is exploited. This is an arbitrage opportunity where investors are able to make abnormal profits (Mishkin, F. 2013). When an equilibrium is reached so that stock A trades at a price and rate that fits the market, the arbitrage opportunity is eliminated. When there are no arbitrage opportunities, we have an efficient market according to the EMH. Furthermore, it is important to note that the EMH does not require all investors in the market to exploit an arbitrage opportunity. The hypothesis is satisfied as long as a sufficient number of investments are made for the stock to reach its equilibrium. One can conclude that an

arbitrage opportunity is most present when a stock is traded across borders, and the exchange rate has yet to adjust to the new environment. However, that is a short-term forecast and therefore not relevant for our thesis.

To explain the EMH further, we use the formula 𝑅𝑜𝑓 = 𝑅∗, where 𝑅𝑜𝑓 is the optimal forecast of the return and 𝑅∗ is the equilibrium rate of the market. This is true, given that 𝑅𝑜𝑓 = 𝑅𝑒 where 𝑅𝑒 is the expected return on the security. In other words, with all information

available, the market should have an optimal forecast of the return of a security. This forecast is the expected return and, given the absence of arbitrage, the expected return is also the equilibrium of the market. Mishkin phrases this as that prices of securities in a financial market fully reflect all available information and when these criteria are met, the EMH is satisfied. For this thesis, a satisfied EMH in practicality means that all investors have an expected return that is formed from the optimal forecast of the value of the stock. However, it



is important to note that it is difficult to name a price of tax deduction or the value of improved reputation. (Mishkin, F. 2013)

The EMH therefore also strengthens the argument that green bond funds and conventional bond funds are different despite being the same financial instrument. The pricing of bonds can also be used to explain why differences arise, not specific to the financial instrument but more so to explain that price differences relate to the difference in nature of the two


To understand the pricing of bonds, we explain the properties of a bond and the relations that cause a difference in price. Bonds are made up of three elements: 1) maturity, how long investors have to wait before their loan to the issuer is repaid, 2) coupon value, how much the investors receive each year based on interest rate and 3) face value, how much is repaid upon the bond reaching maturity. Investors are generally interested in today’s value of future cash flows to determine whether or not a bond is worth investing in. This is calculated by

discounting the cash flows, in other words calculating the future value of return in today’s value, and this is known as the bond’s yield. Based on the yield investors expect, they will compare it to the price today of lending money to the bond issuer. Price and yield have a negative relationship in the sense that a higher price will lead to a lower yield and vice versa. A yield becomes more attractive given any value when the price is lowered since it will result in a greater profit for the investor. This argument holds, since investors are generally

interested in a greater return, and as described one can deduct that a greater return will lead to a greater yield. In order to attain a higher yield given a fixed coupon, investors will look to purchase the bond at a lower price. However, this presents a dilemma for investors. A bond is more attractive to hold if it has a high price in the case that the investor wants to sell the bond prior to its maturity date. Furthermore, a higher return is connected to risk and opportunity cost. If investors wish to lower the price to increase the yield of a bond, they must recognize that the market has other investments that are either less risky or investments with a lower opportunity cost. Concluding our argument, we find that a bond’s price is determined by both its properties and what other investments are available on the market. This leads to

differences in price, inherently based on risk and opportunity cost of the three elements of a bond (Dixon, H. 2001).

The governments of the United States, the United Kingdom, Germany and Japan are all big solid industrialized economies, and they have excellent credit ratings which means that none of them are likely to default. This implies that the yields on the bonds in each of these countries should be fairly similar. However, in reality this is not the case. For example in the year 2000, the United States’ 10-year bond yielded 5.8% compared to 1.9% for Japan. This yield is volatile and changes over time which leads to the question of what determines the yield of the bond. To understand the differences in the yields of bonds, an investor must understand the three long-run factors that determine bond yields: 1) real yields, 2) inflation

expectations and 3) bond risk premium. Real yields are determined by capital demand and

supply. The greatest influencing factors are the pace of economic growth and the size of government deficits. In other words, a fast-growing economy needs to borrow to finance



investments that increase yields. Inflation expectations are primarily a forecast. The current state of inflation is not what investors look at, rather the importance is placed on future expectations of the development of inflation. Generally, to develop a forecast on inflation, an investor will look at future growth potential and current economic policies. Investors will be cautious for economies growing faster than they are sustainably able to since this is a key indicator of inflationary pressure. With increasing inflation, investors look to increase their yields by marking down the bond price. The bond risk premium stabilizes the fluctuating nature of bond prices. Investors therefore gain a premium on the bond that exceeds the real yield to include expected inflation and its effect on the value of a bond. A volatile inflation environment leads to investors seeking greater return. Despite the inflation situation, the risk premium is generally about one percentage point. (Dixon, H. 2001)

A commonly derived method to understand the pricing of any product is the supply and demand diagram. This is also the preferred method for understanding the pricing of bonds according to Mishkin (2013). The supply curve indicates the amount of bonds issued in the market— in other words the amount of bonds available for investors to purchase. The demand curve indicates how much demand there is for a certain bond type. From the intersection of the curves, we reach an equilibrium, which indicates the market price for a bond. While all bonds have different prices, this is generally how pricing works in a market, and it helps determine if a bond might be overpriced or underpriced.

For Figure 1, we illustrate the price difference based on the market size of bonds. Since the market for green bonds is smaller than the market for conventional bonds, the supply will be lower. Assuming that the demand for green bonds and conventional bonds are the same, we therefore find the price equilibrium of green bonds to be higher than that of conventional bonds. If this is true, one explanation for green bonds being priced higher could be that there are fewer on the market and therefore more investors per bond compared to conventional bonds.



Figure 1. Difference in price based on market availability

Figure 2, shows the assumption that the demand for green bonds will increase. This is a likely assumption as environmental catastrophes increase and propositions regarding the

environment become more popular. Assuming the market size is still smaller, as it has not had time to catch up to the increasing demand, we see an even further increase in the price of green bonds.

Figure 2. Short-term increase in demand.

The diagram above shows how both bond elements and external factors, demand and supply, affect the price of a bond. Due to the volatile nature of bonds, risen from the fact that they are affected by a myriad elements, bond funds provide a more stable price based on market expectations as a whole for the nature of the bonds.



3.2 Previous research in pricing of bonds

Hachenberg and Schiereck (2018) investigate the price of conventional bonds and green bonds, they conclude that green bonds and conventional bonds are priced differently

depending on the issuer and the quality of the bond. Their research has inspired the authors to develop and investigate this field of study further, with the focus on if these different bonds behave differently when faced with economic stress. Since this research is inspired by Hachenberg and Schiereck (2018) and aims to develop their research, the methods in this thesis have, to some extent, been inspired by the methods used in Hachenberg and Schierecks research. In this way, the findings of our research will be more applicable and convertible to current and future research.

Serafiem et al (2018) find that green bonds are priced differently from conventional bonds as well. In particular, green municipal bonds and green bonds that are externally certified have been found to trade at a premium. The term describing that green bonds are more expensive is deemed “greenium” by Agliardi E. and Agliardi R. (2018). They argue that green bonds should in fact be tax exempt to attract investors. Their article describes how tax exemption can make the green bond market grow. However, in retrospect the green bond market has grown sizably according to Tang and Zhang (2020) since its emergence in 2007. Despite the financial crisis that had a global effect in 2008, which lasted for several years, arguably until 2016, the green bond market has had steady growth. The recession caused by the crisis should have made investors more risk averse as they attempt to stay liquid with fewer means; yet the green bond market still grew significantly (Guo, H. 2006). Since the green bond market was new, it was arguably riskier to invest in that than the regular bond market or treasuries. Is there then a reason for tax exemption? Or is the effect of current tax exemption so great that investing in green bonds proves safe and profitable despite the risk of investing in an entirely new market? These questions have yet to be answered through research and presented in literature. This could be proof of why green bonds are priced differently. In addition, it could be questioned if there is a greenium present at all, or if it depends on independent factors not yet identified due to the early stages of the green bond market.

Furthermore, it is not unreasonable to question the actual effectiveness of green bonds due to their suggested premium. Green bonds are used to transition the world from carbon emissions to greener alternatives. Since green bonds are relatively new, it is difficult to assess the long-term effect of the investments made through green bonds. The aforementioned greenium could be a reason that investors choose other bonds rather than green bonds. Why then should a company issue a green bond? Gianfrate and Peri (2019) argue that it is, in fact, a financial debt relief to invest in green bonds rather than conventional bonds. For the issuer, they will therefore experience a lower amount of debt. Coupled with investors looking for tax exemption, green bonds become attractive investments. Therefore, a premium for green bonds can be justified. Both investors and issuers are financially earning from green bonds, while it can improve their reputation. According to Flammer (2021), green bonds have another positive effect for the issuer. Improving post-investment environmental actions, the issuer of the green bond can on average expect a higher rate of long-term investors.



Finally, given that a greenium still is present, one could argue that a green bond and conventional bond of the same quality have inherently different properties that justify a premium price for a green bond. This is further reinforced if the EMH holds true, and there is a price and risk difference between conventional and green bond funds.

3.3 Gaps in research and formulation of hypotheses

Previous research has focused primarily on the investigation of bonds rather than bond funds. Blake, C. et al (1993) argues that the use of bond funds allows us to minimize bond-specific risks that may affect bond pricing but are difficult to distinguish. Using funds instead allows a more detailed view of the potential differences in nature between green bonds and

conventional bonds. Furthermore, using funds also opens up the market for people who want to increase their private capital by investing. Using funds allows inspection of greater volume than by using single bonds since one fund includes multiple bonds. The increased size and minimization of bond-specific risks should therefore enhance the possibility of finding out if there are differences between green bonds and conventional bonds. The EMH indicates if there are significant differences through price and volatility.

The above shows that the existing literature, to a greater extent, focuses on the price and yields of green bonds. Other authors’ investigations have suggested that a greenium might be present. We aim to investigate why this effect occurs, starting by understanding how green bonds work. The goal of this thesis is to reach a conclusion that spreads awareness about green bond funds and the potential difference in risk and profit when comparing them to investments in conventional bond funds.

To answer the given research questions, different hypotheses have been created. The hypothesis has then been tested to see whether they hold true or not. The hypotheses are stated in a way that when tested, they can prove differences in the tested sample and therefore be used to create relevant arguments which can be used to answer the given research

questions in this thesis. Since these hypotheses are predetermined and the theory is tested based on the already existing empirical data, this is considered as a deductive research

approach (Hyde, K. 2000). The following hypotheses are based on investigating the notion in previous research that green bonds and conventional bonds are priced differently. The EMH is used in order to create arguments that can later be discussed to answer the given research question.

H0: Green bond funds and conventional bond funds are initially impacted equally by stress

H1: Green bond funds and conventional bond funds differ in initial impact by stress

H0: Green bond funds and conventional bond funds recover equally after stress

H1: Green bond funds and conventional bond funds do not recover equally after stress.

H0: Green bond funds and conventional bond funds are equally receptive to stress



H0: Green bond funds and conventional bond funds have equal volatility when being of the

same quality

H1: Green bond funds and conventional bond funds do not have equal volatility despite being

of the same quality

4 Implementation of Methodological Approach

In this chapter we provide a reflection on the methods and arguments for why our selected methods are considered favorable for the purpose of the thesis.

Previous research shows that there are differences when it comes to the price of conventional bonds and green bonds. Thus, we will now extend this research by examining how

conventional bond funds and green bond funds behave during economic and environmental stress. Since green bond funds consist of investments in projects that aim to improve the environment, this research will both consider financial crises and environmental disasters when investigating differences between the bond funds. Different events or time periods of economic stress will be considered and analyzed in order to examine potential differences in how the bond funds react. Due to the fact that green bonds are a fairly new instrument and that green bond funds are even newer, the supply on the market is relatively small. Since we also want to have bond funds with fairly similar characteristics, the supply is even further limited. Therefore, ten bond funds are considered to be a feasible amount to create a

trustworthy result for this thesis. Since there will be comparisons between green bond funds and conventional bond funds, matched pairs will be created. Ergo, one green bond fund with as similar characteristics as a conventional bond fund will be paired so a fair comparison can be made between the two. Therefore, we include five green bond funds matched with five conventional bond funds. Since the aim of the research is to find out differences in behavior of these instruments when faced with economic stress, all other factors that might affect the price and volatility of the fund should be minimized. This is unfortunately impossible due to irrational behavior on the market. For example, one factor that can affect the price of a bond within the fund is the bond rating. However, the risk of other factors affecting the price and creating differences between the instruments can be reduced by an increased sample size, minimizing erratic behavior. Using funds, we include as many bonds as possible, both green and conventional, since mutual bond funds are essentially made up of multiple bonds. Bonds have different ratings where the AAA bond is considered to be the most trustworthy and will therefore be priced higher than a bond with a lower rating if all other factors are equal. In the same way as each bond has a rating, the funds are also rated depending on different factors which ends up in an overall rating for the bond funds.

When creating the matched pairs, the content of bonds within each fund will be thoroughly considered and the overall rating will be the same for the different bond funds within each pair. When establishing bond fund pairs, we match the standard deviation, risk, return,



as possible. However, each of the ten bond funds does not, for example, have to be issued at the same time and does not have to obtain the same rank; the importance is that each bond fund in every pair has the same characteristics to make trustworthy comparisons. For

example, we consider the term of a bond to be a greater indicator of similarity than when the bond was issued. It is crucial that each of the matched pairs in this thesis has as similar characteristics as possible in order for us to make trustworthy comparisons in price and volatility when faced with economic or environmental stress.

In order to collect data from the chosen events of economic and environmental stress, we have used Financial Times’ database (, 2021). It is a trustworthy database that displays information on a wide range of both green bond funds and conventional bond funds, suitable to the task of finding five pairs of bond funds to analyze. This database also provides important and accessible information that can be used to easily make comparisons between different bond funds which is crucial for this study. It provides all the information that is needed to find ten bonds that can be created into five matched pairs.

Since the concept of green bond funds is fairly new, our research cannot be done further back than 2016. From 2016, we managed to find five green bond funds and five conventional bond funds that could be matched together, marking the starting date of our research. After that, five specific stress events of either economic or environmental nature have been chosen which have had an adverse effect on the market. We also include two control groups called random events, as no specific event of economic or environmental stress has occurred, and the market has been in a stabilized state. In this way, we can compare and see if there is any difference in how the funds behave when faced with economic stress compared to how they behave during an eventless period. The events will be spread out during the five-year period relevant for this thesis’ investigation. The random events have been chosen during 2016 and 2020 where the market was stabilized in order to further investigate potential differences in how green bond funds and conventional funds act. Since the scope of this study is to investigate green and conventional bond funds during stressful events, however, we do not use five random events. We deem two random events sufficient to act as control groups for Brexit and Covid-19, events 1 and 5, since these two events have had the greatest effect on the market. Thus, we have five events of economic or environmental stress to investigate as well as two control groups for the given period 2016-2020.

The chosen bond funds for this study are issued on the European market. Therefore, when choosing five different events of economic or environmental stress, we have chosen events that have had an effect on the European market. Some of these events have not taken place in Europe, but they are considered to be so large and significant that the European market is affected by the event. Since we use funds in this study, we do not have to consider whether to use opening, closing or highest price throughout the day; the database that we have used only provides one price for each fund each day which is the price that we use when we gather our data. To reduce the risk of daily fluctuations in fund prices, we have chosen to use three consecutive market days before a specific event and then calculated an average of the price from these three days which will provide a more accurate price of the period before the event.



The same process is used during and after each event. This gives nine different prices from each bond fund in each event.

Furthermore, Hachenberg and Schiereck (2018) have included a total of 63 bonds to analyze in their study including green bonds and, as they refer to it, non-green bonds. In this thesis, we have decided to use bond funds. The argument is that, while intrinsically similar, our studies have a critical difference. Hachenberg and Schiereck have chosen to purely compare the prices of the green bonds and conventional bonds. Our study aims to further investigate the area of pricing for green bonds compared to conventional bonds by finding out if there is a reason that can explain a price and risk difference. Thus, we have chosen to compare a fewer amount of bond funds when faced with stress. A bond is known to be volatile and risky to a certain extent. There is no completely risk-free bond as every bond traded is subject to external risk, such as environmental catastrophes or economic failures. For example, during the 2008 financial crisis, bond yields dropped significantly and the effect on the yields would last for years to come. We will investigate crises of the aforementioned natures to find out if there is a difference between how the market reacts to external crises for green bonds

compared to conventional bonds. If a difference is found, it implies that there is a difference in the pricing mechanism of two bonds that are inherently similar with the exemption that the green bonds’ proceeds are used for a different purpose than conventional bonds. If no

difference is found, the implication could be that the green bond market is priced differently because it is new, and once actors on the market learn about the market, prices may even out.

An argument for our method being limited could be the given timeframe of our investigation. Comparing funds during a ten-year span would undeniably bring more data; however, this is not possible due to the blooming nature of the green bond fund market. We aim to counteract this by using more comparisons. The aim of eliminating random results can not only be done by including more samples but also by increasing the amount of testing done. Furthermore, according to Maltais and Nykvist (2020), the existing research on green bonds mostly focuses on the yields of green bonds compared to conventional bonds. We expand this area through our thesis, investigating why there might be a difference to bonds that are otherwise the same financial instrument.

The first event chosen was the referendum held in Great Britain on 23rd June, 2016 regarding their membership in the European Union. The results of the referendum on Brexit had a significant effect on the market as it was made clear to speculators and investors that Brexit would leave the European Union. The market index shows a drop of nearly ten percentage points during the Brexit event. We chose a period of three days before the referendum, three days in consecutive order including the referendum, and three consecutive days following the event.

The second chosen event was in 2016 when Donald Trump was elected president. The US election had a significant effect on the global economy, and in the 2016 election, the market went down the days before the election due to the uncertain outcome. Therefore, we



election and a week after to see how the bond funds behaved during times of uncertainty. We chose two weeks prior to the election as speculations about the future should be higher than usual, we made the election event include three days rather than one to ensure that the effect of the election results were accounted for, and finally ten days after the election in order to extract data of how the market adjusted to the results of the election.

The third event is in December 2018 when there was a trade war between the US and China which created uncertainty in the global economy causing the economy to fall significantly during this month. We have chosen to calculate the average price of the three days before the market took a downturn, then in the middle of the month, and finally at the end where the market had started to recover.

The fourth event is a long period of 2019 when the wildfires started to spread around

Australia causing natural resources to become lost in the fires, people losing their homes and the climate issue to become more heated. This is an event that can be used to see if the green investment behaves differently during this period due to increase in demand in climate investments. We calculated the average price of three days in May, before the fires started, then three days at the end of September and three days at the end of the same year. The wildfires continued a couple of months into 2020, but the occurrence of Covid-19 affected the market which makes it near impossible to calculate the effect of the wildfires on the market.

The fifth and last event is the outbreak of Covid-19 in 2020. The virus started spreading at the end of 2019 and, as of the date of writing, still continues to spread throughout the world, making the outcome of this event purely speculative. Although, in February 2020 when the virus started to spread in Europe and several countries started lockdowns, the market took a downturn. Therefore, we have chosen to calculate the average price of three days before the downturn started, then three days when the market hit its bottom and lastly three days a month later when the market had started to recover. In this way, we can see which of these bond funds managed better during the downturn and which of them recovered faster.

Random event 1 is a control group for the referendum regarding Brexit, Event 1. We have chosen a length of the first random event period that reflects the length of the Brexit event. In order to make a just comparison, the first random event period has been placed where no significant economic or environmental stress occurred. The market changes that did occur were not out of the ordinary, and the market is therefore in a normal state.

Random event 2 is a control group for Covid-19, Event 5. We have chosen a period of time that reflects the length of Event 5, occurring six months later in the same year. In this way, we are able to compare the market’s behavior during Covid-19 and during a stabilized market. While the market in general has risen unexpectedly high during 2020, we argue that this poses no obstacle for Random event 2. As actors on the market have identified the growth and expectations are set on further growth, the market should be considered to be in a



“normal” state. Thus, with the lack of particular economic or environmental stress-events, Random event 2 fulfills the requirement as a control group to the Covid-19 event.

After the prices had been collected from the Financial Times database, they were then summarized in an Excel file for further investigation. In order to conduct the research, Excel is a tool that will be used frequently due to its many functions that will simplify the

possibility to conduct the different tests needed to test the hypothesis that this research aims to answer. Further, Excel is used to create formulas used to simultaneously analyze a large amount of data. It will also be easier to create percentage differences in prices of different bond funds which will be more descriptive when later analyzing and comparing the different bond funds. Excel allows easily applicable formulas when conducting research that enable the possibility to extend the research by creating a larger sample set.

The data extracted from the Financial Times database was converted into percentage means in order to minimize the impact of the price of purchasing a part of a bond fund. The results were calculated as percentage change between each period in each separate event; the same calculation was made for all individual bond funds. Furthermore, the average percentage change was also calculated in groups of green bonds and conventional bonds, during each event, a total average of all events, and finally as a total over the period 2016-2020.

To make comparisons between the different bonds, we first calculate an average of the values before any event in three consecutive days. This is followed by the same calculation for three consecutive days including the event date, and finally an average is calculated with the same method for a period after the event when the market is stabilized. From the average values, we have calculated the percentage change in value for the period before to during the event, during to after, and finally over the entire event period: before compared to after. We have then grouped the average results for green bonds and conventional bonds in separate columns in order to see the effect of both bond fund groups for each event. With this data, we have compared the average percentage change in green bond funds to the average percentage change for conventional bond funds by subtracting the percentage change in green bond funds with the percentage change in conventional bond funds. A positive result indicates that the green bond funds have performed better, while a negative result indicates that the

conventional bond funds have performed better as groups rather than individual bond funds. For each event and individual bond fund group, we have calculated key figures that are used as grounds for our hypotheses. These key figures are the mean value over the total event period calculated by adding the value of each date for the event and dividing by the amount of days. For our thesis, we have used nine days in total for each event. Our second and third key figures are variation and standard deviation. We use these to represent volatility for each bond fund in our thesis. Variation is calculated as:









− 𝑥)


𝑛 − 1



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