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Do Sustainable Stocks Offer Diversification Benefits for Conventional Portfolios? An Empirical Analysis of Risk Spillovers and Dynamic Correlations

Author

Listed:
  • Mehmet Balcilar

    (Department of Economics, Eastern Mediterranean University, Turkey ; Department of Economics, University of Pretoria, South Africa ; and IPAG Business School, Paris France)

  • Riza Demirer

    (Department of Economics & Finance, Southern Illinois University Edwardsville, USA)

  • Rangan Gupta

    (Department of Economics, University of Pretoria ; and IPAG Business School, Paris, France)

Abstract

This paper explores the potential diversification benefits of socially responsible investments for conventional stock portfolios by examining the risk spillovers and dynamic correlations between conventional and sustainability stock indexes from a number of regions. We observe significant unidirectional volatility transmissions from conventional to sustainable equities, suggesting that the criteria applied for socially responsible investments do not necessarily shield these securities from common market shocks. While significant dynamic correlations are observed between sustainable and conventional stocks, particularly in Europe, the analysis of both in- and out-of-sample dynamic portfolios suggests that supplementing conventional stock portfolios with sustainable counterparts improves the risk/return profile of stock portfolios in all regions. The findings overall suggest that sustainable investments can indeed provide diversification gains for conventional stock portfolios globally.

Suggested Citation

  • Mehmet Balcilar & Riza Demirer & Rangan Gupta, 2016. "Do Sustainable Stocks Offer Diversification Benefits for Conventional Portfolios? An Empirical Analysis of Risk Spillovers and Dynamic Correlations," Working Papers 201609, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201609
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    JEL classification:

    • 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
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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