Investing in Green Bonds

This chapter examines green bond investing from a portfolio-management perspective, with a specific focus on hedging performance under normal and stress conditions. Building on earlier chapters on market development, standards, and credibility, it shifts the unit of analysis from issuers (the supply side) to investors (the demand side) and evaluates whether green bonds provide diversification, hedge, or safe-haven benefits relative to conventional bonds, equities, foreign exchange, and oil-related commodity exposure across China, Europe, and the US. Using daily index data over 2014–2022, the chapter models marginal return dynamics with heavy-tailed innovations and conditional heteroskedasticity and then estimates cross-asset dependence using static and time-varying copula frameworks alongside nonparametric quantile-based robustness checks. The evidence indicates that green bond dependence is state-contingent: correlations are often weak or negative in typical conditions, consistent with diversification, but tail dependence is statistically meaningful for most asset pairs, implying that joint extreme losses can occur during crises. Hedging weight and hedging effectiveness results further show that the hedging role of green bonds varies across markets and assets, weakening against bonds and equities during COVID-19 while strengthening for foreign exchange risk, particularly in Europe. The chapter concludes that green bonds can contribute to portfolio resilience, but their hedging value depends on market structure, the risk being hedged, and regime shifts, with clear implications for investor practice and for policies that aim to scale credible and liquid green bond markets.