Here's the Greenium eclipsed by market-wide illiquidity in the municipal bond market

Date

2026-01-01

Author

Ayaydın Hacıömeroğlu, Hande
Danışoğlu, Seza
Güner, Zehra Nuray
Sahin, Baki Cem

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This study examines whether a greenium exists in the municipal bond market. Estimations show that after controlling for bond, market, and issuer characteristics, green bonds are issued with a yield advantage between 15 and 25 basis points. This finding is confirmed by using the Oaxaca-Blinder decomposition while accounting for the differences in the bond, market, and issuer characteristics of green and conventional bonds. Decomposition results still show a yield difference between 10 and 20 basis points, which cannot be explained by any of the known control factors. This unexplained yield differential is the greenium in the municipal bond market. Analyses also show that when the impact of the liquidity premium on the green bond yield is ignored, it is possible to conclude that the greenium is insignificant. The study also models a municipality's decision to issue green instead of conventional bonds and presents findings that municipalities are more likely to issue green bonds after periods of higher market liquidity, larger average greenium, and if they have already issued a green bond in the past. Climate related concerns and awareness in an issuer's state also make a municipality more likely to prefer green bonds over conventional bonds when financing is needed.

URI

https://hdl.handle.net/11511/117858

Collections

Department of Business Administration, Article