Are diversification benefits sustainable at uncertain times? Reflections from traditional indices and green and blue ETFs volatility co-movement

Abstract

Thanks to the pressing environmental concerns, lately a substantive body of research have attempted to assess the magnitude of volatility spillover from traditional to the sustainable asset markets. Yet, we have insufficient understanding on varied diversification advantages of sustainable assets such as the blue and green ETFs against price movements in other asset markets. This is important because corporations are now legally bound to ensure a structural shift of production externalities as they steadfastly adopt sustainable practices across production lines. However, persistent market uncertainties can confuse investors of the potential diversification benefits as they do not stick to a strong sensemaking of the future return value of blue and green ETFs. In this circumstance, one would expect potential heterogeneity in the strength of dynamic interconnectedness among both classes of assets as economies move steadily from low to high uncertainty episodes. This paper analyzes the impact of the Covid-19 pandemic and Russia-Ukraine war on spillover dynamics and demonstrate by using a Quantile VAR framework. We study how the desired narrative of ‘shock absorption’ and ‘shock dumping’ characteristics of assets change during turbulent times. We surmise that uncertain times triggers highetend information asymmetric for a prolonged period and investors normally become ‘short-term’ gain-centric because they do not yet have a clear vision for long-term growth returns from traditional assets. A trade-off between traditional and sustainable assets acrue but there is a bias towards sustainable assets as stringent environmental laws pave the way for a secured diversification benefits from the latter class of assets.

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ORCID for Tapas Mishra: orcid.org/0000-0002-6902-2326

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