# Governmental incentives for green bonds investment

**Authors:** Bastien Baldacci, Dylan Possamaï  
**arXiv:** [2101.00648](https://arxiv.org/abs/2101.00648)  
**Date:** 2021-01-03  
**Summary page:** https://www.summarizepaper.com/en/paper/2101.00648v1/

## Key points

- Study develops a model for investor's trading activities involving green and conventional bonds issued by the same governmental entity
- Government provides incentives to bondholders to encourage investment in green bonds
- Incentives are optimally indexed on factors including bond prices, quadratic variation, and covariation
- Numerical simulations using French governmental bonds show that the approach outperforms existing tax-incentive systems in promoting green investments
- Methodology remains robust across different model specifications for bond prices and can be applied to large portfolios of bonds using classical optimization methods
- Extended model considers a more complex framework for short-term rates of green bonds, showing similar trends to deterministic short-term rates
- Optimizing incentives based on bond prices and other relevant factors can effectively promote sustainable investments
- Methodology is applicable to larger portfolios and resilient to different modeling approaches for short-term rates

## Summary

Motivated by the growing interest in the green bond market, the authors of this study develop a model that focuses on an investor's trading activities involving both green and conventional bonds issued by the same governmental entity. In order to encourage investment in green bonds, the government provides incentives to bondholders. These incentives are designed to be optimally indexed on various factors, including bond prices, quadratic variation, and covariation. To evaluate the effectiveness of their methodology, the authors conduct numerical simulations using a set of French governmental bonds. The results demonstrate that their approach outperforms existing tax-incentive systems in terms of promoting green investments. Additionally, they find that their methodology remains robust across different model specifications for bond prices and can be applied to large portfolios of bonds using classical optimization methods. In further analysis, the authors explore the robustness of their model by considering a more complex framework for short-term rates of green bonds. They assume a one-factor stochastic model driven by a one-dimensional Brownian motion and calibrate it using a least-square algorithm. The optimal investment policy obtained from this extended model shows similar trends to those observed with deterministic short-term rates. Overall, this study provides valuable insights into governmental incentives for green bond investments. The findings suggest that optimizing incentives based on bond prices and other relevant factors can effectively promote sustainable investments. The authors also highlight the applicability of their methodology to larger portfolios and its resilience to different modeling approaches for short-term rates.