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Understanding dynamic return connectedness and portfolio strategies among international sustainable exchange-traded funds

Author

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  • Xu, Danyang
  • Corbet, Shaen
  • Lang, Chunlin
  • Hu, Yang

Abstract

The rapid growth of sustainable investing has led to the global expansion of environmental, social, and governance (ESG) investment products. Existing literature on sustainable investing focuses primarily on corporate social responsibility theory and risk assessment, with relatively little research on ESG investment value and portfolio strategies. Using data from six worldwide ESG exchange-traded funds (ETFs) between 2020 and 2023, we examine return connectedness and portfolio performance by employing a time-varying parameter vector autoregressive (TVP-VAR) and portfolio approaches. The findings reveal that European ETF plays a dominant role in the worldwide ESG system due to the market size and market maturity. Specifically, the European ETF can substantially reduce portfolio volatility. Moreover, the results show that minimum variance and risk-parity portfolios outperform the other portfolio strategies during periods of geopolitical turmoil. These results provide valuable insights for improving the resilience of ESG markets and enhancing sustainable investment strategies.

Suggested Citation

  • Xu, Danyang & Corbet, Shaen & Lang, Chunlin & Hu, Yang, 2024. "Understanding dynamic return connectedness and portfolio strategies among international sustainable exchange-traded funds," Economic Modelling, Elsevier, vol. 141(C).
    • Handle: RePEc:eee:ecmode:v:141:y:2024:i:c:s0264999324002219
    DOI: 10.1016/j.econmod.2024.106864
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    Keywords

    ESG; Exchange-traded funds; Dynamic connectedness; Hedging effectiveness; Portfolio strategies;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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