Does asset-based uncertainty drive asymmetric return connectedness across regional ESG markets?

Abstract

This paper investigates the impact of asset-based uncertainty on the asymmetric return connectedness and hedging effectiveness of regional environmental, social and governance (ESG) equity markets from January 2017 to December 2022. The results of the asymmetric time-varying parameter vector autoregressive connectedness approach show strong dynamic connectedness within regional ESG markets, with the dominance of negative returns intensifying during COVID-19. Quantile regressions reveal that uncertainty in crude oil and bond markets negatively affects asymmetric return connectedness across bearish, normal and bullish market periods, whereas uncertainty in stock, gold and exchange rate markets has a positive impact. Overall, asset-based uncertainty influences negative return connectedness more than positive return connectedness, and a varied influence of asset-based uncertainty is noted during COVID-19 and the Russia–Ukraine war. A portfolio analysis shows that all ESG markets significantly contribute to higher hedging effectiveness, with a portfolio constructed based on the minimum connectedness approach outperforming the other portfolios. The findings provide policy implications for portfolio and risk management strategies.