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

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  • Martiradonna, Monica
  • Romagnoli, Silvia
  • Santini, Amia

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.

Suggested Citation

  • Martiradonna, Monica & Romagnoli, Silvia & Santini, Amia, 2023. "The beneficial role of green bonds as a new strategic asset class: Dynamic dependencies, allocation and diversification before and during the pandemic era," Energy Economics, Elsevier, vol. 120(C).
    • Handle: RePEc:eee:eneeco:v:120:y:2023:i:c:s0140988323000853
    DOI: 10.1016/j.eneco.2023.106587
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    References listed on IDEAS

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    Cited by:

    1. Lorenzo Mercuri & Andrea Perchiazzo & Edit Rroji, 2023. "Investigating Short-Term Dynamics in Green Bond Markets," Papers 2308.12179, arXiv.org.
    2. Akhtaruzzaman, Md & Banerjee, Ameet Kumar & Boubaker, Sabri & Moussa, Faten, 2023. "Does green improve portfolio optimisation?," Energy Economics, Elsevier, vol. 124(C).

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    More about this item

    Keywords

    Green bonds; Diversification; Dynamic conditional correlation; Dynamic copula; Portfolio allocation; COVID-19 pandemic;
    All these keywords.

    JEL classification:

    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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