The Duration Characteristics of Green Bonds
Chihao Xu
Co-Presenters: Individual Presentation
College: College of Business and Public Management
Major: Finance
Faculty Research Mentor: Huaibing Yu
Abstract:
Title: The Duration Characteristics of Green BondsAuthor: Chihao Xu, Kean UniversityFaculty Research Advisor: Dr. Huaibing YuAbstract: Green bonds have gained prominence as a key financing tool for sustainable development, offering a way to fund environmentally friendly projects while attracting investors with Environmental, Social, and Governance (ESG) priorities.However, the financial characteristics of green bonds are less known, particularly regarding their duration. Duration matters as a factor to measure sensitivity to interest rates, affecting investment and risk management plans alike. This study investigates whether green bonds have different duration profiles compared to traditional bonds and how they behave under varying interest rate environments.Comparative analysis was conducted using time series data from Bloomberg and MSCI, comparing the duration changes between green bonds and traditional bonds. The study employed various measures of duration, including Macaulay Duration, Modified Duration, and Option-Adjusted Duration (OAD), to evaluate the impact of ESG characteristics on bond sensitivity. The findings confirm that green bonds have longer durations than traditional bonds, thus making them more sensitive to interest rates. During periods of low interest rates, bond prices increase, leading to an extension of duration, with green bonds exhibiting a greater extension than their traditional counterparts. During high-interest-rate periods, bond prices decrease, contracting duration, though green bonds exhibit a relatively lesser contraction.These results suggest that green bond investors tend to have longer investment horizons and that the stability of the green bond investor base is one part of the explanation for less exuberant selling behavior under increasing interest rates. This research provides valuable insights for policymakers and investors in reducing interest rate risk in sustainable investment portfolios.Keywords: Green Bonds, Duration, Interest Rate Sensitivity, ESG Investing, Sustainable Finance