Does Green Bond Improve Portfolio Diversification? Evidence From China

26 Pages Posted: 1 Mar 2022

See all articles by Yingwei Han

Yingwei Han

School of Economics and Management,China University of Geosciences, Beijing

Ping Li

Beihang University (BUAA) - School of Economic and Management Science

Sanmang Wu

China University of Geosciences (CUG)

Multiple version iconThere are 2 versions of this paper

Date Written: January 9, 2022

Abstract

Green bonds are a type of fixed-income instrument that is specifically used to raise funds for projects with environmental benefits to mitigate and adapt to climate change. China's green bond market expanded rapidly in recent years due to national push for net-zero emissions and the growing appetite of investors. However, little is known about the investment benefits of green bonds from the perspective of portfolio optimization. This paper investigates whether green bonds offer better risk-return profile compared to conventional bonds in China. We compare the out-of-sample diversification benefits of green bonds and conventional bonds using various asset allocation strategies. The results show that the portfolio with green bonds leads to higher risk-adjusted returns than the portfolio with conventional bonds across different asset allocation strategies and risk aversions. This is mainly due to the increase in returns after including green bonds in the portfolio. Overall, our findings suggest that China's green bonds should be included in optimal portfolios.

Keywords: Green bonds; Asset allocation; Portfolio diversification; Out-of-sample performance

JEL Classification: G10; G11; Q56

Suggested Citation

Han, Yingwei and Li, Ping and Wu, Sanmang, Does Green Bond Improve Portfolio Diversification? Evidence From China (January 9, 2022). Available at SSRN: https://ssrn.com/abstract=4004407 or http://dx.doi.org/10.2139/ssrn.4004407

Yingwei Han (Contact Author)

School of Economics and Management,China University of Geosciences, Beijing ( email )

NO. 29, Xueyuan Road, Haidian District
Beijing, 100083
China

Ping Li

Beihang University (BUAA) - School of Economic and Management Science ( email )

37 Xue Yuan Road
Beijing 100083
China

Sanmang Wu

China University of Geosciences (CUG)

Wuhan, China
Wuhan, Hubei 430074
China

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