The Systematic Risk of Green Bonds

Sammanfattning: This paper evaluates the profitability of adding green bonds to a portfolio consisting of stocks and conventional bonds. To determine the profitability, ten portfolios with varying weights on green bonds, conventional bonds and stocks, are constructed. The risk-adjusted returns on the portfolios are implemented in time series regressions of several asset pricing models, including the Capital Asset Pricing Model and an extended Fama-French framework. The intercept of the models, Jensen’s alpha, is used to measure the risk-adjusted performance of the portfolios. Also, the results are checked for robustness by applying various performance measures to the data. For the time period employed in this study, 12.05.2016-31.12.2018, the results suggest that adding green bonds to a portfolio can increase the risk-adjusted returns. The best performing portfolio is a portfolio with 60% stocks and equal weights on green bonds and conventional bonds. This result is consistent throughout all the models and performance measures included in the paper, when the bond returns are proxied by the yields of the bonds. Implementing this proxy is in line with the assumption that private investors hold the bonds to maturity. However, if the assumption is dropped and the price changes are used as the proxy, the results differ. In this case, investing in a pure stock portfolio produces the highest risk-adjusted returns.