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

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Maneesh Gupta
Maneesh Gupta
Maneesh Gupta
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Vipul Kumar Singh
Vipul Kumar Singh
Vipul Kumar Singh
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Pawan Kumar at Flame University
Pawan Kumar
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Abstract and Figures

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.
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Vol.:(0123456789)
Journal of Asset Management
https://doi.org/10.1057/s41260-024-00393-w
ORIGINAL ARTICLE
Resilience ofgreen bonds inportfolio diversification: evidence
fromcrisis periods
ManeeshGupta1· VipulKumarSingh1 · PawanKumar2
Revised: 22 November 2024 / Accepted: 28 November 2024
© The Author(s), under exclusive licence to Springer Nature Limited 2024
Abstract
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.
Keywords Green bonds· Portfolio diversification· Systemic risk· TVP-VAR· Downside risk-adjusted returns
JEL Classification G11· G15· C58· Q56
Introduction
Sustainable finance is crucial for driving initiatives that miti-
gate the severe impacts of the climate change crisis. Among
various financial instruments, green bonds (GBs) have
emerged as a major source of funding for projects aimed at
fostering a low-carbon economy. Their pivotal role in this
transition has been extensively documented (Sartzetakis
2021). The climate targets set by the Paris Agreement
and the UN Sustainable Development Goals (SDGs) have
catalyzed the development of green financial instruments,
including sustainability-linked loans or bonds, social impact
bonds, transition bonds, and green loans or bonds. Data from
the Climate Bonds Initiative shows a consistent increase in
GB issuance until the first half of 20231. Despite a 22% drop
in 2022, attributed to a broader slowdown in corporate bond
issuance due to exceptionally high borrowing costs from sig-
nificant monetary tightening by global central banks, this
trend is expected to reverse. More supportive policies and
a stable interest rate environment are anticipated to foster
* Vipul Kumar Singh
vksingh@iimmumbai.ac.in; Vipul.singh22@gmail.com
Maneesh Gupta
maneesh.gupta.2018@iimmumbai.ac.in
Pawan Kumar
pawan.kumar@dcu.ie
1 Indian Institute ofManagement, Mumbai (IIM Mumbai),
Vihar Lake, MumbaiPostalCode:400087, India
2 DCU Business School, Dublin City University, DublinD09,
Ireland
1 https:// www. reute rs. com/ busin ess/ susta inable- busin ess/ green-
bonds- are- set- drive- corpo rate- esg- debt- out- slump- 2023- barcl ays-
2023- 01- 04/.
Content courtesy of Springer Nature, terms of use apply. Rights reserved.
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