Assessing downside and upside risk spillovers across conventional and socially responsible stock markets

Since the aftermath of the recent global financial crisis, socially responsible (SR) investments have become an alternative form of conventional finance, giving rise to further systemic risk between conventional and SR stock markets. In this paper, we assess this risk transmission using Value at Risk (VaR) modeling for the US, Europe and the Asia-Pacific region, over the period covering January 2004–December 2016. We find that socially responsible stock markets exhibit less risk than do conventional markets in terms of the risk hedging properties induced by the SR screening. Second, contributions to systemic risk vary across market phases and return distribution levels, with a larger contribution and spillover effect during the recent global financial crisis. For example, at the downside of the distribution (CoVaR at 5%), the conventional European index shows the highest contribution to the world market’s systemic risk, while the US stock market shows the highest contribution at the upside of the distribution (CoVaR at 95%). This finding is justified by the difference in the risk aversion of investors that varies with the market state as well as the disparities in the development of SR markets.