Asymmetric interconnectedness and investing strategies of green, sustainable and environmental markets

Abstract

This paper aims to analyse the asymmetric dynamic connectedness between green, sustainable, and environmental financial indices and to present their impact on portfolio optimisation. For this purpose, asymmetric TVP-VAR model estimates of return connectedness and spillover positions are used for risk management and to determine portfolio strategies. Differentiating from studies analysing the connectedness between the green assets and markets, this paper compares the asymmetric connectedness of returns and portfolio optimisation strategies with purely environmentally sensitive variables such as green stock and sustainability. The paper also calculates the optimal portfolio weights using different portfolio strategies. Results indicate that asymmetric connectedness is observed between the returns of green, sustainable, and clean energy indices and exchange-traded funds (ETFs). This interconnectedness varies depending on the shocks and the direction of the shocks. The negative information shocks, particularly during turbulent periods increase the dynamic connectedness among markets. In terms of portfolio optimisation, the Minimum Connectedness Portfolio, which takes into account the asymmetric interconnectedness between assets, provides better performance. The methodology that is presented in the study affords a more robust optimisation framework, enabling investors to achieve a sophisticated equilibrium between risk management and return enhancement by leveraging the intricate interdependencies exhibited between financial instruments.