Analyzing the greenium term structure of twin government bonds

Green bonds provide financial backing for low-carbon initiatives and facilitate the transition towards a greener economy. The greenium effect refers to the potential premium that bondholders are willing to forgo when investing in green securities compared to investments with similar characteristics such as maturity, coupon rate, and issuer credit profile. Despite recent interest in the literature on this topic, the determinants and dynamics of the greenium effect remain inadequately understood, particularly regarding its term structure and geographical dependencies. In this paper, we propose a mathematical framework for the definition of the greenium term structure by employing an affine GARCH model for the interest rate. We then compute semi-analytical bond price formulas that are used for the likelihood estimation of model parameters. Empirical analyses using German and Danish twin bonds show that greenium is maturity specific. In particular, for short maturities, fluctuations in greenium dynamics align with the implementation of European directives aimed at accelerating renewable energy adoption.