The beneficial role of green bonds as a new strategic asset class: Dynamic dependencies, allocation and diversification before and during the pandemic era

Monica Martiradonna, Silvia Romagnoli and Amia Santini

Energy Economics, 2023, vol. 120, issue C

Abstract: The paper proposes a full comprehensive analysis of green bond diversification benefits, their co-movement with multiple market indices, and the corresponding implications for portfolio allocation. Based on a time frame of seven years, divided into four sub-periods, the co-movements of green-bond indices, i.e. Solactive Green Bond Index and Bloomberg Barclays MSCI Green Bond Index, and the stock/bond market have been described, shedding light on the connections with sectors most affected by the Covid-19 pandemic. The Solactive Green Bond Index is found to provide the greater diversification benefit of the two green-bond indices, on average during the seven years and also during the pandemic. Allocation strategies and risk performances have also been analyzed to assess the impact of green-bond indices on otherwise traditional portfolios; their diversification power is discussed by use of traditional measures and an additional behavioral approach, drawing attention to its evolution in time and its consistency in terms of diminished risks and increased returns. Portfolios constructed with the inclusion of green bonds prove preferable in terms of risk, in all periods and for all strategies, while the superiority of returns depends on the allocation strategy.

Keywords: Green bonds; Diversification; Dynamic conditional correlation; Dynamic copula; Portfolio allocation; COVID-19 pandemic (search for similar items in EconPapers)
JEL-codes: C50 C58 G01 G10 G11 G12 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:120:y:2023:i:c:s0140988323000853

DOI: 10.1016/j.eneco.2023.106587

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