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Multivariate volatility in environmental finance

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  • Hoti, Suhejla
  • McAleer, Michael
  • Pauwels, Laurent L.

Abstract

There exist several important benchmark indexes in environmental finance, some computed by well-known financial index providers such as the Dow Jones group and others by independent agencies specializing in environmentally and socially responsible investing in finance. The construction of these sustainability indexes relies on two distinct screening methods, positive and negative, which aim to include or exclude candidate companies according to sustainable economic, environmental, social and ethical criteria. We investigate the presence and the importance of multivariate effects in conditional volatility in two major financial time-series indexes, namely the Dow Jones Sustainability Index (DJSI) World and the Ethibel Sustainability Index (ESI) Global, as a way to analyse their relative inherent risk. We further investigate empirically the existence of risk spillovers across these four indexes as a mean to assess the impact of the different screening criteria. Finally, the trends and volatility of two prominent financial indexes, the DJIA and S&P500, are analysed in the same manner to provide a comparison of the performance of the two types of indexes.

Suggested Citation

  • Hoti, Suhejla & McAleer, Michael & Pauwels, Laurent L., 2008. "Multivariate volatility in environmental finance," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 78(2), pages 189-199.
    • Handle: RePEc:eee:matcom:v:78:y:2008:i:2:p:189-199
    DOI: 10.1016/j.matcom.2008.01.038
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    References listed on IDEAS

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    1. Ling, Shiqing & McAleer, Michael, 2003. "Asymptotic Theory For A Vector Arma-Garch Model," Econometric Theory, Cambridge University Press, vol. 19(2), pages 280-310, April.
    2. Ling, Shiqing & McAleer, Michael, 2002. "NECESSARY AND SUFFICIENT MOMENT CONDITIONS FOR THE GARCH(r,s) AND ASYMMETRIC POWER GARCH(r,s) MODELS," Econometric Theory, Cambridge University Press, vol. 18(3), pages 722-729, June.
    3. Suhejla Hoti & Michael McAleer & Laurent L. Pauwels, 2004. "Modelling Environmental Risk," IHEID Working Papers 08-2004, Economics Section, The Graduate Institute of International Studies.
    4. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    5. McAleer, Michael, 2005. "Automated Inference And Learning In Modeling Financial Volatility," Econometric Theory, Cambridge University Press, vol. 21(1), pages 232-261, February.
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    7. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
    8. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    9. Suhejla Hoti & Felix Chan & Michael McAleer, 2003. "Structure and Asymptotic Theory for Multivariate Asymmetric Volatility: Empirical Evidence for Country Risk Ratings," CIRJE F-Series CIRJE-F-203, CIRJE, Faculty of Economics, University of Tokyo.
    10. Ernst R. Berndt & Bronwyn H. Hall & Robert E. Hall & Jerry A. Hausman, 1974. "Estimation and Inference in Nonlinear Structural Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 3, number 4, pages 653-665, National Bureau of Economic Research, Inc.
    11. 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.
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    Cited by:

    1. Yen-Hsien Lee, 2013. "The Predictability of the Socially Responsible Investment Index: A New TMDCC Approach," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 5(1), pages 027-034, June.

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    More about this item

    Keywords

    Environmental risk; Socially responsible investment; Financial risk; Shocks; Spillovers;
    All these keywords.

    JEL classification:

    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • G1 - Financial Economics - - General Financial Markets
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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