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Abstract:
Green bonds have become key instruments in satisfying climate investment needs, yet their secondary market trading behavior remains largely unexplored. Using intraday trading data from Europe's largest corporate bond trading platform from 2017–2023, we find that green bonds exhibit higher liquidity, narrower spreads, and more muted reactions to market shocks than conventional bonds of the same issuer. At the same time, we find that due to high demand and limited supply, purchasing green bonds involves more frictions. Our analysis further reveals positive spillover effects: issuers of green bonds experience improved liquidity, reduced trading costs, and lower price volatility also in their conventional bonds suggesting green bond issuance leads to overall improvements in the issuer's information environment. Green bonds react similarly to credit rating downgrades but show more negative price reactions to environmental controversies, consistent with attracting investors driven by non-pecuniary as well as financial motives.
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