Portfolio diversification and sustainable assets from new perspectives

Takashi Kanamura ()
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Takashi Kanamura: Kyoto University

Journal of Asset Management, 2023, vol. 24, issue 7, No 7, 600 pages

Abstract: Abstract We aim to examine the portfolio diversification effects of sustainable assets on financial and energy market assets from two new bird’s-eye perspectives of distribution normality and CVaR-return optimization, which can widely include the magnitude of the portfolio’s price return distribution and which are consistent with those of sustainable asset holders, compared to correlations that are often used as a criterion for diversification effect so far but are from a worm’s-eye perspective, in that they exclude the magnitude of price returns and narrowly focus on price return directions. The contribution of this paper is threefold. First, to examine the portfolio diversification effect of sustainable finance assets, we propose a model that determines the diversification effect from the normality-related stable distribution parameters of $$\alpha$$ α and $$\beta$$ β in portfolio returns. Second, empirical analyses find that sustainable assets of clean energy indexes, ESG indexes, and green bonds contribute diversification effects on financial and energy portfolios from the two new bird’s-eye perspectives of distribution normality and CVaR-return optimization, respectively. Third, we show that only green bonds among the three sustainable assets have diversification effects on financial and energy portfolios from the existing worm’s-eye perspective of dynamic conditional correlations with an exogenous variable. It misleadingly implies that the diversification effect of sustainable assets obtained from stock indexes such as clean energy or ESG indexes cannot necessarily hold from the well-known small correlations. In other words, this study suggests for asset management that judging the diversification effect of sustainable assets based on simple correlation results may not capture the whole picture of the diversification effect of sustainable ones, in particular from bird’s-eye perspectives.

Keywords: Diversification effect; Sustainable assets; Bird’s-eye perspectives; $$\alpha$$ α -stable distribution; Mean-CVaR portfolio optimization; DCC-X model (search for similar items in EconPapers)
JEL-codes: C46 G11 Q56 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1057/s41260-023-00336-x

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