Sovereign green bond and country value and risk: Evidence from European Union countries

Abstract

The sovereign green bond market has been growing rapidly worldwide since its debut in 2016. The study investigates the empirical response of the stock and credit default swap (CDS) market to green bond issuance by 10 EU countries during the period 2016–2021. We document that the issuance of a green bond is regarded by the investors as reflecting as value-enhancing and risk-reducing behavior by EU countries. The issuance of sovereign green bond provides a strong signal of the country's involvement to a low-carbon economy by increasing the social and reputational benefits. This effect is even more evident during the pandemic crisis. The reaction of stock and CDS market is driven by several factors such as bond and country characteristics. Overall, our findings suggest that the sovereign issuance of green bonds acts as mitigation mechanism for country risk.