Abstract
The paper examines the role of green bonds in hedging the risk against industry portfolios and other major asset classes. It mainly focuses on how the greenness of the portfolio reduces the risk of green portfolios containing green bonds and 11 industrial sectors and major financial assets from October 2014 to November 2021. The results show that the risk of green portfolios is lower than that of unhedged (non-green) portfolios. Furthermore, our study provides evidence that the hedging effectiveness of green portfolios improves during the COVID–19 pandemic. Finally, the results show that investors across the risk aversion spectrum gain higher utility after considering the transaction costs while investing in green portfolios. These results are new additions to prior literature that can interest investors, fund managers, and policymakers.
•The risk of green portfolios is lower than that of non-green portfolios.•Green bonds are an effective hedge in calm and tranquil market phases.•The hedging effectiveness of green portfolios improved during the COVID–19 period.•Investors across the risk aversion spectrum gain higher utility from green portfolios.•Hedging on green portfolios remains effective after accounting for transaction costs.