Low Carbon Indexing and Correlation Indices: Implications for Portfolio Management

Julien Chevallier

Chapter 11 in Handbook of Global Financial Markets:Transformations, Dependence, and Risk Spillovers, 2019, pp 275-296 from World Scientific Publishing Co. Pte. Ltd.

Abstract: This chapter deals with the construction of a tracker of low carbon index (such as the MSCI low carbon) and its performance in a portfolio management application. The tracker is built from raw data with PCA, factor detection, and DCC models techniques. The portfolio application is a standard Markowitz application with and without the desired low carbon index. The data is composed of financial data in addition to commodities. Another related topic is discussed in the chapter, i.e., the performance of correlation indices (constructed similarly to the low carbon index but in a DCC framework) with respect to financial stress on the market (proxied by the St Louis Fed Stress Index). The “horse race” concerns the correlation index built from our methodology versus its main competitor the VIX correlation index. Key results include that the PCA–DCC technique is easily reproducible and efficient to construct a tracker of the targeted index at the least cost for the financial advisor (e.g., no subscription fee).

Keywords: Market Integration; Risk Management; Risk Assessment; Financial Uncertainty; Volatility; Financial Markets; Financial Development; Country Risks; Sovereign Debt Markets (search for similar items in EconPapers)
JEL-codes: F37 (search for similar items in EconPapers)
Date: 2019
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