Climate change implications for the catastrophe bonds market: An empirical analysis

<abstract> <p>With the aim of effectively preventing and controlling systemic risk, by stimulating the advancement of the green bond market, it is significant and imperative to help investors and policymakers adopt more effective measures, which will ensure them to maximize profit. We construct VAR, DCC-GARCH and Copula-CoVaR models, and study the spillover effect between the green bond market and traditional bond market from the three perspectives of mean spillover, volatility spillover and extreme risk spillover using the data on daily closing prices of green bond market and traditional bond market indices. The research findings of this paper are as follows: (1) There are three spillover effects of mean value, volatility and extreme risk among the green bond market, corporate bond market, enterprise bond market and conventional bond market. (2) From the perspective of mean spillover between markets, only the mean spillover between the conventional bond market and the green bond market is bidirectional, and there is the profoundest impact of spillover from the green bond market to the conventional bond market. (3) As far as the volatility spillover between markets is concerned, the volatility spillover between the three traditional bond market and the green bond markets are all positive. The volatility spillover between the conventional bond market and the green bond market is the largest, which is particularly obvious in the first half of 2018 and the first half of 2020. (4) In terms of inter-market extreme risk spillover, the risk spillover between the green bond market and the traditional bond market is positive. The green bond market contributes more to the risk spillover of the enterprise bond market, and it has a time-varying risk spillover effect on the traditional bond market.</p> </abstract>

This study examines the determinants of greenium – the yield differential between green and conventional bonds-focusing on the European and Chinese green bond markets. It investigates the impact of macroeconomic factors, issuer characteristics such as ESG ratings and certifications, and investor behaviour on greenium dynamics. The research employs comparative analysis and regression models to analyse data from 2010 to 2024 and reveal important differences between the two regions. The findings show that Europe has robust regulatory frameworks such as the EU Taxonomy that have been proving to attract higher greenium and consistently foster confidence among investors. Unlike China, greenium is diluted by the ineffectiveness of state driven mechanisms and inconsistent Environmental, Social, and Governance (ESG) frameworks in China. The findings are consistent with Signalling Theory, which indicates that ESG ratings play a role in lowering information asymmetry in mature markets such as Europe, but they do not in China because of poor certification practises. Broad implications call not only for global standardisation of ESG criteria and certifications but also regional collaboration to harmonise green bond standards. As a cornerstone of sustainable finance, the green bond market must advance, and aligning policies, enhancing transparency and encouraging cross border investment is needed, the study concludes. Greenium is a topic for future research to understand behavioural influences and the long term environmental consequences.

To encourage further development of catastrophe (cat) bond, understanding the causes of cat bond premium puzzle is necessitated. Considering the property of entropy to measure uncertainty, this paper establishes an entropy model about risk assessment in catastrophe bond investors' decision making. Moreover, this article analyzes the model and compares relative influence through simulating actual behavior of both rational and non-rational investors. The conclusions obtained show that with inadequate information, cognitive biases and collecting cost increase the high yield demand of investors in cat bond market.

Green finance has grown as a strategy in recent years for attaining sustainable development and resolving the tension between economic growth and climate change. Today, green bonds dominate the ESG (Environment, Social and Governance) themed bond market, and in this new era of green development, China's green bond market is becoming increasingly influential in the international arena. However, the development of green bonds in China is immature, and despite the existence of unified principles in policy this year, the Chinas green bond market is still relatively inactive compared to foreign countries, and the motivation of issuers and investors needs to be evoked. The PEST model is used to analyze the macro environment of a market or an enterprise, focusing on the four most influential external factors, namely Politics, Economy, Society and Technology, to analyze the macro environment of the Chinese green bond market. This paper therefore applies the PEST model to analyze the domestic green bond market environment and make recommendations for green bonds market in China to reach a higher level of development. By analyzing four major factors in the green bond market - political, economic, social and technological - this thesis is known to show that the current green bond policy tends to improve, the market is growing at a faster rate and the participation of private enterprises in society is low. Therefore, the analysis of the green bond market gives difficulties faced by the advancement and the ways to solve them.

Insurance securitization has long been hailed as an important tool to increase the underwriting capacity for companies exposed to catastrophe-related risks. However, global volumes of insurance securitization have remained surprisingly low to date which raises questions over its benefits. In this paper, we examine changes in the market value of insurance and reinsurance firms which announce their engagement in insurance securitization by issuing catastrophe (Cat) bonds. Consistent with the hitherto underwhelming contribution of Cat bonds to global catastrophe coverage, we do not find evidence that Cat bonds lead to strong wealth gains for shareholders in the issuing firm. More importantly, we report large variations in the distribution of wealth effects in response to the issue announcement. We show that the wealth effects for shareholders in firms which issue Cat bonds appear to be driven by explanations according to which Cat bonds offer cost savings relative to other forms of catastrophe risk management (and less by the potential of Cat bonds to hedge catastrophe risk). Thus, abnormal returns are particularly large for issues by firms which face low levels of loss uncertainty (which reduces the information acquisition costs in financial markets) as well as for issues during periods when prices for catastrophe coverage (including Cat bonds) are low.

Many countries are pursuing energy security (ES) in their economies while implementing sustainable development goals (SDGs). Relevant policies may include: (1) access to efficient alternative and preferably renewable energy sources (RESs); and (2) reductions in conventionally obtained energy consumption. As the demand for energy is growing and alternative energy resources are expensive, new ways of financing projects to improve ES are of special interest, e.g., issuing green bonds. In such cases, the obtained funds are allocated to projects that can both improve ES and help to achieve SDGs. The aim of the study was to explore the dependences (in the sense of Granger causality) between the green bond (GB) market, different aspects of sustainable development, as measured by global indicators taken from a family of environmental NASDAQ OMX indices, and ES represented by crude oil prices. The methodology is based on the vector autoregression model. The findings reveal evidence of a short-term dependence between the GB market, ES and the multidimensional nature of sustainable development.

Is there a green premium in the green bond market? Systematic literature review revealing premium determinants

This thesis focuses on the research of the application and effect of ESG investment strategy in the green bond market. By expounding the rise of green finance under the background of global sustainable development, the purpose and significance of studying the application and effect of ESG strategy in the green bond market are clarified. After introducing the relevant theoretical basis, this paper analyzes its application status, dissects the implementation details and effectiveness of the strategy through typical cases, discusses the problems existing in the application, such as inconsistent standards, information asymmetry and insufficient market maturity, and then puts forward countermeasures and suggestions to improve the standard system, strengthen information disclosure and promote market development. ESG investment strategies in the green - bond market face issues like standard inconsistencies. Solutions can enhance their application and market development.

Purpose This study investigates the challenges impeding the development of an effective green bond market in Vietnam and evaluates its potential to support the country’s transition from carbon-intensive industries to a greener economy, in line with its climate commitments. Design/methodology/approach This study uses a qualitative research approach, conducting semi-structured interviews with 15 stakeholders representing different segments of Vietnam’s financial sector. Thematic analysis was carried out in three stages: initial coding, exploring connections between codes and developing three main themes: barriers for corporate issuers, investor attractiveness and the green bond market’s potential. Findings The major barriers for corporate issuers include a lack of intermediaries, regulatory shortcomings, high issuance costs and an underdeveloped corporate bond market. From the investor perspective, green bonds are perceived as less attractive due to relatively low yields, high project risks, limited market awareness and a scarcity of investment options. Despite these challenges, the market holds significant potential, supported by Vietnam’s net-zero ambitions, government backing and continuous legal framework improvements. Research limitations/implications The study covers a sample weighted towards issuers, due to the limited public awareness of green investment. Future research could also include regulatory perspectives and use quantitative methods to expand upon these findings, especially as the market matures. Findings inform policymakers and practitioners, offering recommendations such as establishing intermediaries, developing a green taxonomy, legal reform, infrastructure enhancement and investor education. A stronger green bond market can support sustainable development, reduce emissions and promote long-term environmental and social wellbeing. Originality/value This study contributes by addressing a research gap in Vietnam’s green bond market using a qualitative, interview-based method, which is uncommon in the existing literature. It offers real-world insights from a diverse range of market actors, enabling a multidimensional understanding of market dynamics.

Common Risk Factors in the Cross Section of Catastrophe Bond Returns

Analysis of Risk Premium Determinants on Cat Bonds

The study of natural catastrophe models plays an important role in the prevention and mitigation of disasters. After the occurrence of a natural disaster, the reconstruction can be financed with catastrophe bonds (CAT bonds) or reinsurance. This paper examines the calibration of a real parametric CAT bond for earthquakes that was sponsored by the Mexican government, which is based on the estimation of the intensity rate of the arrival process of earthquake (which would trigger this particular CAT bond) from the two sides of the contract: the reinsurance and the capital markets. Additionally, the intensity rate from the historical data was estimated to conduct a comparative analysis. The results demonstrate that, under specific conditions, the financial strategy of the government, a mix of reinsurance and CAT bond, is optimal in the sense that it provides coverage of USD 450 million for a lower cost than the reinsurance itself. <italic>JEL Classification: G19, G29, N26, N56, Q29, Q54</italic>

Minimum Connectedness Portfolios and the Market for Green Bonds: Advocating Socially Responsible Investment (SRI) Activity

Risk spillover and network connectedness analysis of China’s green bond and financial markets: Evidence from financial events of 2015–2020

ABSTRACT.Romania is one of the emerging markets, where the investment funds market is less developed than in other European countries, but developing fast. The number of open-ended funds increased in the 20 years of existence of the investment market, reaching 60 in 2012. The paper looks at the open-ended funds' evolution (measured through the yearly changes in value of the fund unit), in the period 2010-2012. The main objective is to analyze the performance of the different types of mutual funds in a comparative manner and to assess them against the industry benchmark. The analysis takes place in a period of economic turmoil and based on the findings, the paper attempts to point out advices on what would be good placements for investors during economically difficult periods.JEL Classification :G23, G11, D53, E22Keywords: open ended funds, Romania, investment funds' performanceIntroductionInvestment funds represent an alternative investment opportunity to bank deposits or to direct investments on the Stock Exchange. They contribute to the development of financial markets, as new possibilities of investment for those who have available resources. Among those, open ended funds are seen as a primary instrument of investment for most individuals and households (Lenard et al., 2003). In the last decades, the role of mutual funds increased in the financial markets, as in 2007 the world mutual funds industry administered financial assets of 26 trillion USD compared to 1996 when there were administered 6 trillion USD assets (Ferreira et al., 2010).The investment funds industry in Romania is a young industry, as it has only 20 years of existence. Its youth places it as an underdeveloped market, by comparison to the U.K, Germany and France from Europe or United States from America. The industry had an initial difficult start at the beginning of 1990's, when due to the lack of regulating rules, investors lost a lot of money and registered high failures on the investment funds market. Once the market started to be better regulated, allowing for higher control and less risk of failure for investors (due to un-appropriate calculation methods), it also started to develop.The main objective of this paper is to compare the evolution of different types of open ended funds of Romania and their performances in the last years in order to identify which categories of funds performed better in the context of the present economic crisis. The evolution is measured through the funds' yearly changes in value of the fund unit.Investment funds and their performance - a literature reviewInvestment funds are organizations that gather funds from individuals and invest these funds in securities traded on the stock exchange, in money market instruments and in municipal or corporate bonds. They represent an alternative investment option to deposits in commercial banks and to direct investments on the Stock Exchange (Prisacariu et al., 2008; Bodie et al., 2009). Investment funds are classified according to different criteria: method of management, goals, the composition of the fund's portfolio, markets and investment strategy. The method of management is seen as the most important criterion to classify investment funds and according to it, there are three types of investment funds: a) unit investment trusts, b) open-ended funds and c) closed-end funds. The unit investment trusts administer a fixed portfolio that is seen as being unmanaged (Bodie et al., 2009), as compared to the other two types of investment funds (open- ended and closed-ended funds) that hold portfolios that are continuously bought and sold, therefore being managed. The open-ended funds issue permanently investment assets, allowing some investors to subscribe permanently and simultaneously allowing others to totally drop out. On the other hand, the closed-ended funds do not issue permanently and they address only to a limited number of investors, who purchase the shares when the fund is launched and redeem them when the fund closes. …