Connectedness between low carbon portfolios, economy and finance: the role of pandemic crisis and Ukrainian war

Abstract

PurposeThe purpose of this work is to study the connections generated between stock market indices, representing firms whose practices focus on fighting climate change and several global risk factors in accordance with the sustainability objectives defined in the 2030 Agenda. An endogenous perspective is adopted, considering the spillovers generated within the low carbon stock market sector, as well as the latter’s exposure to exogenous shocks of an economic and financial nature.Design/methodology/approachThis work uses a multivariate model of dynamic correlation (GARCH-corrected dynamic conditional correlation [cDCC]), which can accompany the correlations generated over time.FindingsConsidering five low carbon indices, representing various parts of the world, and four global macro-economic and financial variables, over a period of approximately eight years, it was possible to understand that the variables studied transmit between each other a statistically significant spillover. The period of the pandemic crisis shows a sharp increase in the information transmission process. It was also possible to conclude that some global variables are risk factors, performing the role of transmission channels for the spillover effects to low carbon indices, increasing the risk of contagion and reducing the possibilities of diversifying the investment portfolio.Originality/valueFirstly, this work analyses the connection and spillover effects between low carbon indices. Secondly, considers an extended sample covering different market phases, particularly that of the pandemic crisis and the Ukrainian War, creating conditions to compare connection patterns between those indices. Thirdly, it studies the variable influence over time of global risk factors in the transmission of spillover between low carbon indices.