Do Green Bonds Add Value in Multi-Asset Portfolios : Evidence from China

The green bond market has been growing rapidly worldwide in recent years. This paper investigates the role of green bonds in asset allocation considering Chinese financial markets. We use CoVaR to examine the risk spillovers between green bonds and stock-bond markets, finding that green bonds and bonds are strongly dependent as expected. We find no risk spillovers between green bonds and stocks, suggesting that green bonds have diversification benefits for stock investors. We analyze the in-sample and out-of-sample diversification effects of green bonds on a stock-bond portfolio using various asset allocation strategies. The main results show that for most asset allocation strategies, green bonds improve the Sharpe ratio of a stock-bond portfolio in different market environments and can provide downside risk protection during the COVID-19 pandemic