Quantile-based spillover connectedness among stochastic volatilities of ESG equities, Islamic and conventional stocks with implications for portfolio management

Mahdi Ghaemi Asl, Rabeh Khalfaoui, Hamid Reza Tavakkoli and Sami Ben Jabeur

International Journal of Emerging Markets, 2023, vol. 19, issue 11, 3938-3976

Abstract: Purpose - This study aims to investigate the relationship between stock markets, environmental, social and governance (ESG) factors and Shariah-compliant in an integrated framework. Design/methodology/approach - The authors employ the multivariate factor stochastic volatility (mvFSV) framework to extract the volatility of the different sectoral indices. Based on this evidence, the authors employ the quantile vector autoregressive (QVAR) approach to examine the dynamic spillover connectedness among the aforementioned indices. Findings - The study emphasizes the following major findings: (1) significant time-varying spillover connectedness across quantiles, (2) bidirectional and asymmetric spillover effect among the ESG index and the other sectoral indices, (3) the strength of spillover connectedness is time-varying across quantiles, (4) based on the perspective of portfolio optimization, ESG market is a significant strong forecasting contributor to conventional and Shariah-compliant markets, (5) overall, the findings point out serious quantile pass-through effect among ESG index and the other sectoral indices during the COVID-19 health crisis. Originality/value - This study extends the previous literature in the following ways. First, to the best of the researchers’ knowledge, none of the existing studies have investigated the relationship between stock markets, ESG factors and Shariah-compliant in an integrated framework. Second, this study extends the previous scholarships by applying the mvFSV. Third, the authors propose a new rolling version to estimate dynamic spillovers, namely the rolling-window quantile VAR method. This approach provides a great advantage in computing the dynamics of return and variance spillover between variables in terms not only of the overall factor but also of the net (pairwise) aspect.

Keywords: Volatility; Spillover connectedness; ESG index; Shariah-compliant; Portfolio diversification (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijoemp:ijoem-03-2022-0362

DOI: 10.1108/IJOEM-03-2022-0362

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