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Open AccessArticle

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

by 1,2,3, 4 and 5,6,*
1
Department of Economics, Eastern Mediterranean University, Turkish Republic of Northern Cyprus, via Mersin 10, Famagusta, Turkey
2
Department of Economics, University of Pretoria, Pretoria 0002, South Africa
3
2300 Avenue des Moulins, 34080 Montpellier, France
4
Department of Economics & Finance, Southern Illinois University Edwardsville, Edwardsville, IL 62026-1102, USA
5
Department of Economics, University of Pretoria, Pretoria 0002, South Africa
6
IPAG Business School, 184 Boulevard Saint-Germain, 75006 Paris, France
*
Author to whom correspondence should be addressed.
Sustainability 2017, 9(10), 1799; https://doi.org/10.3390/su9101799
Received: 14 August 2017 / Revised: 27 September 2017 / Accepted: 28 September 2017 / Published: 4 October 2017
(This article belongs to the Special Issue Risk Measures with Applications in Finance and Economics)
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. View Full-Text
Keywords: socially responsible investment; multivariate regime-switching; time-varying correlations; volatility transmission socially responsible investment; multivariate regime-switching; time-varying correlations; volatility transmission
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Balcilar, M.; Demirer, R.; Gupta, R. Do Sustainable Stocks Offer Diversification Benefits for Conventional Portfolios? An Empirical Analysis of Risk Spillovers and Dynamic Correlations. Sustainability 2017, 9, 1799.

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