Do green bonds provide diversification benefits? The need for tax incentives

Papavassiliou, Ellie; Topaloglou, Nikolas; Zenios, Stavros A.

Abstract

We examine whether, or under what conditions, green bonds offer diversification benefits when included in broad investor portfolios alongside assets from other financial markets. Using stochastic spanning non-parametric tests without any distributional assumptions on returns, we find that US and European investors benefit from adding green bonds to a diversified portfolio. However, the benefits are nuanced and non-robust out-of-sample in the global markets, and we evaluate whether tax incentives can make green bonds uniformly attractive for international investors. We find that with a somewhat lower tax rate and tax credits in case of losses, green assets offer consistent diversification benefits. Tax credits during market downturns preserve the diversification benefits even with higher tax rates.

Citation

Papavassiliou, E., Topaloglou, N., & Zenios, S. A. (online). Do green bonds provide diversification benefits? The need for tax incentives. Annals of Operations Research, https://doi.org/10.1007/s10479-025-06501-2

• Journal Article Type: Article
• Acceptance Date: Jan 15, 2025
• Online Publication Date: Mar 12, 2025
• Deposit Date: Mar 17, 2025
• Publicly Available Date: Mar 17, 2025
• Journal: Annals of Operations Research
• Print ISSN: 0254-5330
• Electronic ISSN: 1572-9338
• Publisher: Springer
• Peer Reviewed: Peer Reviewed
• DOI: https://doi.org/10.1007/s10479-025-06501-2
• Public URL: https://durham-repository.worktribe.com/output/3709236