The Nordic High Yield Green Bond Market : Construction and Performance Analysis of a Corporate Green Bond Index

Abstract

The aim of this thesis is to study the Nordic high yield green bonds and their performance in the secondary market from 2019 until today, with a focus on the crisis following the outbreak of the Covid-19 pandemic. The analysis is conducted by constructing and backdating an index of Nordic high yield green bonds, which is then compared to two carefully selected benchmark indices. The index construction is based on Barclays’ index methodology. Using common measures of risk-adjusted return and single-factor CAPM regressions, the analysis finds that green bonds show greater resilience during the period of market turmoil in 2020. However, when one of the benchmarks is reweighted to match the sector composition in the Green Bond Index, the higher returns are no longer statistically significant. When the market liquidity, measured by the average relative bid-ask spread, is analysed, a similar pattern is discovered. The average relative spread for the high yield market excluding oil-related sectors is higher than the average relative spread for green bonds. Still, the difference is lower when adjusted for the sector composition in the green bond market, indicating that green bonds are more liquid than conventional bonds. The thesis finds that the main reason for the observed outperformance, measured by risk and return, can be attributed to the sector composition of the green bond market. We can therefore not conclude that the returns and liquidity are higher solely because the bonds are labelled as green.