AFII Quantitative research

The option pricing model for SLBs, developed by AFII, draws on a Black-Scholes approach, with KPIs linked to carbon emissions. Using case studies, we show that a lower cost-of-capital can be achieved by issuers that choose to introduce transparent and impactful targets.  

 This paper demonstrates how to apply and account for leverage and short positions in the context of carbon footprinting and climate impact. Our analysis suggest ample opportunities for traditional fixed income portfolios to add long-short overlays in order to reduce or even negate their core position’s carbon footprint.  

This paper develops a novel method to price and investigate the green bond risk (spread) premium based on historical volatility. It applies the methodology for a number of twin-bonds with special emphasis on how the bonds fared during the covid-19 market volatility in 2020H1. SSRN link: https://www.ssrn.com/abstract=3624591

This paper develops the ECOBAR model to conduct practical carbon intensity reduction in complex fixed-income portfolios without affecting alpha generation capacity. In the empirical part, ECOBAR is applied on a real traded credit portfolio as well as a broad long-short derivative strategy, and shown to be not reducing the alpha opportunity set in a significant manner. SSRN link: https://www.ssrn.com/abstract=2987772 and YouTube GRASFI presentation https://www.youtube.com/watch?v=kIoY4KBoAhY

Full title: Notes on risk-neutral pricing of SLBs and step-down structures. This paper develops a binomial model to evaluate the pricing of sustainability linked bonds and in particular SLBs with step-down features, complementing AFII's earlier option pricing approach. SSRN link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4258897