Assessing dynamic connectedness in global supply chain infrastructure portfolios: The impact of risk factors and extreme events

This paper analyzes global supply chain investment risk factors (i.e., energy market, investor sentiment, and global shipping costs). It then presents portfolio strategies responsive to dynamic risks. We employ a time-varying vector autoregression model to examine the spillovers and interconnectedness among these factors from January 5, 2010, to June 29, 2023, using a set of environmental, social, and governance (ESG) indexes. Hedge ratios (HRs) and hedging effectiveness (HE) are calculated to determine optimal long and short positions for these portfolios. We then assess the impact of extreme events on risk spillovers and investment strategies by comparing periods before and after COVID-19. Our results show that risk shocks drive dynamic connectedness among infrastructure portfolios, and we highlight how extreme events affect spillovers and investment outcomes. Portfolios with higher ESG scores exhibit stronger connectedness with other portfolios and factors. Net total directional connectedness indicates that West Texas Intermediate (WTI), the Baltic Exchange Dry Index, and the investor sentiment volatility index (VIX) are consistent net receivers of spillover shocks, while the GLFOX portfolio alternates as a time-varying receiver and transmitter. Pairwise connectedness analysis reveals that WTI and VIX are predominantly receivers, whereas CSUAX, GII, and FGIAX portfolios act as net transmitters. COVID-19 altered the structure of dynamic connectedness across portfolios: shifts in mean HR and HE suggest that long/short position weights underwent structural changes post-outbreak, and portfolios with higher ESG scores demonstrated superior hedging ability. These findings offer valuable insights for investors adjusting hedging strategies in global supply chain infrastructure investments.