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

Mehmet Balcilar, Riza Demirer and Rangan Gupta

No 201609, Working Papers from University of Pretoria, Department of Economics

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.

Keywords: Socially Responsible Investment; Multivariate regime-switching; Time-varying correlations; Volatility transmission (search for similar items in EconPapers)
JEL-codes: C32 G11 G12 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2016-02
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Journal Article: Do Sustainable Stocks Offer Diversification Benefits for Conventional Portfolios? An Empirical Analysis of Risk Spillovers and Dynamic Correlations (2017)
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