IDEAS home Printed from https://ideas.repec.org/a/eee/ecmode/v38y2014icp609-618.html
   My bibliography  Save this article

Modeling volatility and conditional correlations between socially responsible investments, gold and oil

Author

Listed:
  • Sadorsky, Perry

Abstract

Socially responsible investing (SRI) is one of the fastest growing areas of investing. While there is a considerable literature comparing SRI to various benchmarks, very little is known about the volatility dynamics of socially responsible investing. In this paper, multivariate GARCH models are used to model volatilities and conditional correlations between a stock price index comprised of socially responsible companies, oil prices, and gold prices. The dynamic conditional correlation model is found to fit the data the best and used to generate dynamic conditional correlations, hedge ratios and optimal portfolio weights. From a risk management perspective, SRI offers very similar results in terms of dynamic conditional correlations, hedge ratios, and optimal portfolio weights as investing in the S&P 500. For example, SRI investors can expect to pay a similar amount to hedge their investment with oil or gold as investors in the S&P 500 would pay. These results can help investors and portfolio managers make more informed investment decisions.

Suggested Citation

  • Sadorsky, Perry, 2014. "Modeling volatility and conditional correlations between socially responsible investments, gold and oil," Economic Modelling, Elsevier, vol. 38(C), pages 609-618.
  • Handle: RePEc:eee:ecmode:v:38:y:2014:i:c:p:609-618
    DOI: 10.1016/j.econmod.2014.02.013
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0264999314000571
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Leonardo Becchetti & Rocco Ciciretti, 2009. "Corporate social responsibility and stock market performance," Applied Financial Economics, Taylor & Francis Journals, vol. 19(16), pages 1283-1293.
    2. Kroner, Kenneth F & Ng, Victor K, 1998. "Modeling Asymmetric Comovements of Asset Returns," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 817-844.
    3. Suhejla Hoti & Michael McAleer & Laurent L. Pauwels, 2007. "Measuring Risk In Environmental Finance," Journal of Economic Surveys, Wiley Blackwell, vol. 21(5), pages 970-998, December.
    4. Stephen Brammer & Chris Brooks & Stephen Pavelin, 2006. "Corporate Social Performance and Stock Returns: UK Evidence from Disaggregate Measures," Financial Management, Financial Management Association International, vol. 35(3), pages 97-116, September.
    5. Bauer, Rob & Otten, Roger & Rad, Alireza Tourani, 2006. "Ethical investing in Australia: Is there a financial penalty?," Pacific-Basin Finance Journal, Elsevier, vol. 14(1), pages 33-48, January.
    6. Suhejla Hoti & Michael McAleer & Laurent L. Pauwels, 2004. "Modelling Environmental Risk," IHEID Working Papers 08-2004, Economics Section, The Graduate Institute of International Studies.
    7. Sébastien Laurent & Luc Bauwens & Jeroen V. K. Rombouts, 2006. "Multivariate GARCH models: a survey," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(1), pages 79-109.
    8. Bauer, Rob & Koedijk, Kees & Otten, Roger, 2005. "International evidence on ethical mutual fund performance and investment style," Journal of Banking & Finance, Elsevier, vol. 29(7), pages 1751-1767, July.
    9. Shunsuke Managi & Tatsuyoshi Okimoto & Akimi Matsuda, 2012. "Do socially responsible investment indexes outperform conventional indexes?," Applied Financial Economics, Taylor & Francis Journals, vol. 22(18), pages 1511-1527, September.
    10. Maria Céu Cortez & Florinda Silva & Nelson Areal, 2012. "Socially Responsible Investing In The Global Market: The Performance Of Us And European Funds," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 17(3), pages 254-271, July.
    11. El Hedi Arouri, Mohamed & Jouini, Jamel & Nguyen, Duc Khuong, 2011. "Volatility spillovers between oil prices and stock sector returns: Implications for portfolio management," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1387-1405.
    12. Renneboog, Luc & Ter Horst, Jenke & Zhang, Chendi, 2008. "The price of ethics and stakeholder governance: The performance of socially responsible mutual funds," Journal of Corporate Finance, Elsevier, vol. 14(3), pages 302-322, June.
    13. Tim C. Opler & Jonathan Sokobin, "undated". "Does Coordinated Institutional Activism Work? An Analysis of the Activities of the Council of Institutional Investors," Research in Financial Economics 9505, Ohio State University.
    14. Hong, Harrison & Kacperczyk, Marcin, 2009. "The price of sin: The effects of social norms on markets," Journal of Financial Economics, Elsevier, vol. 93(1), pages 15-36, July.
    15. John E. Core & Wayne R. Guay & Tjomme O. Rusticus, 2006. "Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Investors' Expectations," Journal of Finance, American Finance Association, vol. 61(2), pages 655-687, April.
    16. Zakri Y. Bello, 2005. "Socially Responsible Investing And Portfolio Diversification," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 28(1), pages 41-57, March.
    17. Karen Benson & Timothy Brailsford & Jacquelyn Humphrey, 2006. "Do Socially Responsible Fund Managers Really Invest Differently?," Journal of Business Ethics, Springer, vol. 65(4), pages 337-357, June.
    18. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-350, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Raza, Naveed & Jawad Hussain Shahzad, Syed & Tiwari, Aviral Kumar & Shahbaz, Muhammad, 2016. "Asymmetric impact of gold, oil prices and their volatilities on stock prices of emerging markets," Resources Policy, Elsevier, vol. 49(C), pages 290-301.
    2. repec:taf:applec:v:50:y:2018:i:3:p:319-334 is not listed on IDEAS
    3. repec:spr:eurase:v:8:y:2018:i:2:d:10.1007_s40822-018-0095-3 is not listed on IDEAS
    4. Nikolaos Sariannidis & Grigoris Giannarakis & Eleni Zafeiriou & Ioannis Billias, 2016. "The Effect of Crude Oil Price Moments on Socially Responsible Firms in Eurozone," International Journal of Energy Economics and Policy, Econjournals, vol. 6(2), pages 356-363.
    5. Antonakakis, Nikolaos & Kizys, Renatas, 2015. "Dynamic spillovers between commodity and currency markets," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 303-319.
    6. Dey Shubhasis & Sampath Aravind, 2017. "Dynamic Linkages between Gold and Equity Prices: Evidence from Indian Financial Services and Information Technology Companies," Working papers 251, Indian Institute of Management Kozhikode.
    7. repec:eee:jrpoli:v:52:y:2017:i:c:p:201-206 is not listed on IDEAS
    8. repec:eee:pacfin:v:54:y:2019:i:c:p:13-28 is not listed on IDEAS
    9. Nicholas Apergis & Vassilios Babalos & Christina Christou & Rangan Gupta, 2015. "Identifying Asymmetries between Socially Responsible and Conventional Investments," Working Papers 201537, University of Pretoria, Department of Economics.
    10. repec:eee:ecofin:v:47:y:2019:i:c:p:65-84 is not listed on IDEAS
    11. Basher, Syed Abul & Sadorsky, Perry, 2016. "Hedging emerging market stock prices with oil, gold, VIX, and bonds: A comparison between DCC, ADCC and GO-GARCH," Energy Economics, Elsevier, vol. 54(C), pages 235-247.
    12. Mehmet Balcilar & Zeynel Abidin Ozdemir & Huseyin Ozdemir & Mark E. Wohar, 2019. "Fed’s Unconventional Monetary Policy and Risk Spillover in the US Financial Markets," Working Papers 15-47, Eastern Mediterranean University, Department of Economics.
    13. Joscha Beckmann & Theo Berger & Robert Czudaj & Thi-Hong-Van Hoang, 2019. "Tail dependence between gold and sectorial stocks in China: perspectives for portfolio diversification," Empirical Economics, Springer, vol. 56(3), pages 1117-1144, March.
    14. repec:gam:jrisks:v:7:y:2019:i:1:p:15-:d:203150 is not listed on IDEAS
    15. repec:eee:jrpoli:v:53:y:2017:i:c:p:88-102 is not listed on IDEAS
    16. repec:eee:glofin:v:38:y:2018:i:c:p:30-44 is not listed on IDEAS
    17. Ftiti, Zied & Fatnassi, Ibrahim & Tiwari, Aviral Kumar, 2016. "Neoclassical finance, behavioral finance and noise traders: Assessment of gold–oil markets," Finance Research Letters, Elsevier, vol. 17(C), pages 33-40.

    More about this item

    Keywords

    Socially responsible investing; GARCH; Volatility; Oil prices;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:38:y:2014:i:c:p:609-618. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/inca/30411 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.