Navigating Geopolitical Risks: Deciphering the Greenium and Market Dynamics of Green Bonds in China

Abstract

This study investigates whether green bonds have an issuance cost advantage over conventional bonds (greenium), examines the impact of geopolitical risks on their price dynamics, and explores the industry-specific effects of such risks in the financial sector. Using a dataset of 270 green bonds and 667 conventional bonds from May 2018 to August 2021, this study applies a two-step panel estimation method to analyze the influence of geopolitical risks on green bond pricing. The findings indicate that green bonds in China have an issuance cost advantage compared to traditional bonds, with a premium of 10–12 bps. Additionally, both recent and historical geopolitical risks, including GPR threats and GPR acts, significantly reduce green bond financing costs, with the China-specific geopolitical risk index having the most substantial impact, lowering costs by up to 17.4 bps. This study also highlights the financial sector, where green bonds do not display an issuance premium, and geopolitical risk has a slightly lower effect compared to the overall market. These results provide a comprehensive analysis of the impact of geopolitical risks on the pricing of Chinese green bonds, utilize strict screening criteria and the latest two-stage panel estimation method for more reliable analytical conclusions, and establish green bonds as reliable tools for sustainable investment.