Resilience of green bonds in portfolio diversification: evidence from crisis periods

This study examines the interconnectedness between the green bond index (GRBI) and major financial indices, focusing on three key periods: Pre-Covid, During-Covid, and Russia-Ukraine war period. Using the spillover index methodology and time-varying parameter vector autoregression (TVP-VAR), the research compares two portfolios: one excluding GRBI (base portfolio) and one including GRBI (delta portfolio). The findings reveal that GRBI consistently acts as a net receiver of shocks, significantly reducing the total connectedness index (TCI) and functioning as a spillover absorber. Notably, the equity index (EQWI) emerges as the largest net transmitter of shocks, while GRBI helps reduce systemic risk, particularly during periods of market volatility. The inclusion of GRBI enhances the delta portfolio’s resilience, improving its downside risk-adjusted returns and hedging effectiveness. During crisis periods, the delta portfolio consistently outperforms the base portfolio in downside risk measures, such as lower drawdowns and improved ratios like the Sortino and modified Sharpe ratios. GRBI also acts as a natural hedge, reducing negative hedging effectiveness (HE) values in other asset classes. These results highlight the crucial role of GRBI in strengthening portfolio diversification and risk management. Investors seeking to optimize portfolio performance and minimize exposure to systemic shocks should consider including GRBI, especially during periods of heightened market uncertainty.