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May 6, 2026Sustainability0 citationsOpen Access

Sustainability Investment in Distress: Volatility Spillovers and ESG Markets Portfolio Implications

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AEAgbortoko Agbortoko EgbeŞEŞerife Zihni EyüpoğluMSMehdi Seraj

Key Points

  • This research examines the behavior of sustainability investments under stressful conditions and their impact on portfolio management.
  • Applied the Diebold and Yilmaz framework and DCC-GARCH model
  • Analyzed 2382 observations across various indices
  • Conducted robustness checks with varying rolling windows and lag specifications
  • Found a total volatility index of 76.95%, indicating high market integration
  • Identified SPX, TSX, EURUSA, and S&P500 as primary volatility transmitters
  • ESG50 and ESG30 behave as shock absorbers, contrasting with S&P500
  • Provided hedge ratios ranging from 0.23 to 0.90, suggesting strong diversification opportunities

Abstract

This study examines sustainability investments under stressful and constrained scenarios. The study exploits a wide range of indices, ranging from sustainability, ESG, to financial. The Diebold and Yilmaz framework and the DCC-GARCH were employed. The analysis covered 2382 observations with results capturing aggregate cross-market connectedness. The total volatility index, 76.95% based on static analysis, indicates the markets are highly integrated. The predominant net volatility transmitters are the SPX, TSX, EURUSA, and S&P500, while ESG50, ESG30, CAC, and Midi are net volatility receivers. The dynamics significantly vary, reaffirming the fact that the ESG50 and ESG30 are shock absorbers with an inverse behavioral pattern seen in the S&P500. Meaningful results based on the modern portfolio theory weights and DCC-GARCH hedge ratios based on the index pairs provide substantial diversification opportunities with hedge ratios ranging from 0.23 to 0.90. Robustness checks based on sensitivity checks with respect to varying rolling windows and lag specifications confirm the stability and validity of the findings. These empirical results are relevant for the establishment of sustainable portfolio construction and portfolio risk management in the global markets.

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Cite This Study

Egbe et al. (2026) studied this question.

synapsesocial.com/papers/69fa8eac04f884e66b53109ahttps://doi.org/10.3390/su18094403
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