Green Bond Valuation: A Numerical Mathematics Perspective

Green Bond Valuation: A Numerical Mathematics Perspective: Assessing the Influence of Environmental Factors

Rutten, Jurriaan (TU Delft Electrical Engineering, Mathematics and Computer Science)

Vuik, Cornelis (mentor)
Dwarka, V.N.S.R. (graduation committee)

Delft University of Technology

Applied Mathematics | Financial Engineering

2024-02-14

This thesis presents a novel approach to the pricing of green bonds, a growing segment in financial markets with an emphasis on environmental sustainability. Unlike traditional financial instruments, green bonds uniquely incorporate environmental considerations, particularly carbon price (c_t), along with traditional factors like the short rate (r_t), into their valuation. This integration is increasingly relevant in today’s economy, reflecting a shift towards sustainable finance. The core of this research involves applying advanced numerical methods, including the Finite Difference Method, Crank-Nicolson discretization, GMRES and Bi-CGSTAB, in order to develop and analyze pricing models for both green and conventional bonds. The study aims to assess how environmental factors impact the efficiency of these numerical techniques and to compare the outcomes with conventional bond models. The research reveals that green bonds, compared to conventional bonds, present unique numerical challenges, notably requiring more iterations for convergence in iterative methods GMRES and Bi-CGSTAB because of the high carbon price volatility (σc) and the ’Greenium’ phenomenon. Moreover, the comparative analysis showed that while Bi-CGSTAB outperforms GMRES in the green bond model, the opposite is true for conventional bonds. This study not only contributes to the theoretical understanding of green bond pricing but also offers practical insights for financial analysts and investors navigating this evolving market.

Keywords: Green Bonds, Bond Pricing, Zero-Coupon Bond, Short Rate Modeling, Numerical Methods, Crank-Nicolson, GMRES, BiCGSTAB, Environmental Finance, Sustainable Investing, Comparative Analysis, Financial Modeling.

Green Bonds
Bond Pricing
Zero-Coupon Bond
Short Rate Modeling
Numerical Methods
Crank-Nicolson
GMRES
Bi-CGSTAB
Environmental Finance
Sustainability
Sustainable Investing
Financial Modeling

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Student theses

master thesis

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