Are brown stocks valuable to green stocks? Evidence from China

Green stocks attract investors and policymakers as they can generate economic returns and promote environmental sustainability and social responsibility goals. However, green stocks are also perceived as riskier than traditional brown stocks. This study examines how brown stocks diversify green stocks in China using portfolio allocation based on centrality measures in a green–brown stock network. The empirical results show that most brown stocks are located at the edge of the stock network, with lower centrality. Portfolios with low-centrality stocks always include some brown stocks with large weights. The mean-variance allocation method outperforms the Equal Weighted and Minimum Variance models. Finally, adding brown stocks to the green stock portfolio significantly increases the expected return and reduces portfolio risk. In particular, brown stocks with moderate centrality offer better diversification effects. Our findings have significant investment and policy implications for investors and regulators.