Integration Among the Socially Responsible Investment, Green, Dirty, and Energy Cryptocurrencies: A Portfolio Diversification Perspective

Socially responsible investment (SRI) practices are increasingly widely adopted, and moving into mainstream investment activity. Among the suite of instruments available to responsible investors is a fixed-income offering known as a green bond - a specialized bond in which the use of proceeds are strictly earmarked for projects with an explicit ‘green’ orientation. The market for green bonds was established in 2007, and in recent years is achieving a phase of maturity. Notwithstanding this, there is as yet scant evidence or empirical insights around their potential value to investors. Here we question whether green bonds have a (value-enhancing) role to play in a balanced fixed-income investment portfolio. We phrase our analysis around international bond indices, for green versus black bonds in the three major market regions for green bonds, namely the US, Europe and China. A time-varying parameter vector auto-regression (TVP-VAR) econometric framework is applied to daily data - spanning July 2016 to April 2019 - to examine aggregate network, and pairwise dynamics as they have evolved through time and illustrate the evolving nature of connectedness between these core bond-market benchmarks. Following this, bond portfolios are constructed with dynamic weighting schemes (including a novel ‘minimum connectedness’ portfolio) to question, if, when and to what extent green bonds are part of an international fixed-income investor’s portfolio. The results indicate a non-trivial role for green bonds, with weights ranging from approximately 40% to 80% depending on time, and portfolio construction choice. Chinese green bonds typically have the largest weight of the green bond indices, especially under minimum-variance portfolios, while in the preferred ‘minimum connectedness’ portfolio there is a much more balanced representation of US, European and Chinese green bonds. Our analysis contributes unique evidence to the literature on the role of SRI practices as a complement to mainstream investment.

PurposeOn the backdrop of growing importance of Shariah compliant equity markets, the purpose of this paper is to study cross-country portfolio diversification benefits for investors with major trading partners of Saudi Arabia, namely, USA, China, Japan, Germany and India, who have already invested or tend to invest in Saudi Arabian stock market.Design/methodology/approachThe authors have investigated time invariant, dynamic correlations at different investments horizons of the investors among Islamic asset classes by applying relevant econometric techniques like multivariate generalized autoregressive conditional heteroscedastic –DCC and continuous wavelet transforms. For robustness, this study also applied maximal overlap discrete wavelet transform.FindingsThe findings tend to indicate that the Saudi Arabian investors have portfolio diversification benefits with all major trading partners in the short-term investment horizon. Interestingly, Saudi Arabian market has the least portfolio diversification benefits with the Chinese market. However, in the long run, all markets are correlated, yielding minimum portfolio diversification benefits and most importantly Saudi Arabian investors have portfolio diversification benefits with the Indian Islamic equity market in almost all investment horizons. The findings are highly consistent across different econometric technique estimations.Research limitations/implicationsThe authors are only considering five major trading partners of Saudi Arabia. Also, the authors are using S&P and FTSE shari’ah index. Moreover, the time period of the study is constrained by the availability of shari’ah indices. Econometric limitations are also well documented in the literature.Practical implicationsThe results could be beneficial for the investors, portfolio managers, hedge fund managers and institutional investors and also could be useful for the policy makers in their policy-making decisions.Originality/valueOnly very few studies have looked into the benefits of international portfolio diversification from the perspective of local investors as well as the portfolio diversification benefits with the major trading partners of Saudi Arabia. One of the novelties of the method is to make the stock investors, practitioners and policy makers aware of the portfolio diversification benefits available at different time scales such as 4, 8, 16, 32, 64 and 256 trading days as investment holding periods to unveil the true dynamics of co-movement between those different assets.

An empirical investigation of market risk, dependence structure, and portfolio management between green bonds and international financial markets

Uncovering risk transmission between socially responsible investments, alternative energy investments and the implied volatility of major commodities

Problem statement: Over the last ten years there has been a phenomena l growth in the amount of funds placed in SRI globally estimated to be around US$6.5 trillion while around US$55 billion in the Australian market. Accurate knowledg e of correlation of the Australian SRI market with other SRI markets overseas is crucially important f or Australian (SRI) investors for international portfolio diversification since portfolio diversifi cation theory posits that the lower (higher) the correlation between markets, the higher (lower) the gains to be made. The study examines the relationship of the Australian SRI market with four teen other markets-Canada, Denmark, France, Germany, Hong Kong, Ireland, Japan, Netherlands, Norway, South Africa, Sweden, Switzerland, United Kingdom and the United States. Approach: The relationships of the Australian Socially Responsible Investment (SRI) market with other SRI markets worldwide during the period 1994-2009 are examined based on the dynamic conditional correlation multivariate GARCH model (DCC- MVGarch). In the DCC method, the multivariate conditional variance estimation is simplified by estimating univariate GARCH models for each market. Using the transformed residuals resulting from the first stage, the authors can estimate a conditi onal correlation estimator. The standard errors for the first stage parameters remain while the standard er rors for the correlation parameters are modified. Results: Our results showed that the Australian market expe rienced a surge in correlation with all other markets during the global financial crisis. D uring the period of study, the correlation of Austr alia with Canada, Denmark, Norway and the United Kingdom increased over time while its correlation with other countries remained stationary. This impl ies that the Australian SRI market is becoming more integrated with those of Canada, Denmark, Norway and the United Kingdom. Therefore, these overseas markets provide less portfolio diversifica tion benefits to Australian SRI investors while the other markets still offer some opportunities. Conclusion/Recommendations: This study examined the relationship of the Australian Socially Responsible Investment (SRI) market with other SRI markets worldwide during the period 1994-2009 based on dynamic conditional correlation multivariate GARCH model that provides accurate correlations over time that can be incorporated into portfolio models. Australian SRI market was analyzed with fourteen other markets around the world such as Canada, Denmark, France, Germany, Hong Kong, Ireland, Japan, Netherlands, Norway, South Africa, Sweden, Switzerland, United Kingdom and the United States. The results showed that the Australian market experienced a spike in correlation with the other markets during periods of market distress; fo r example, during the recent global financial crisis. In spite of the fluctuations in the correlations o f Australian with the other markets the correlations generally remain below 1. Australia's correlation with Denmark, Norway and Japan increased while with others our market was more or less stationary except from 2007 onwards-global financial crisis. C learly, it still pays for Australian investors to diversify internationally since the correlations ar e still less than 1. However, it pays less to diver sify to such markets as Japan, Norway and Denmark while diversification benefits can be obtained from the other markets. Importantly, our results suggested t hat diversification to other SRI markets is less

The investment behavior of socially responsible individual investors

As Socially Responsible Investment (SRI) enters the mainstream of professional and institutional investment practice, some perplexities arise. Some SRI market participants are well schooled in finance but are hesitative as to how to apply non-financial criteria in the management of portfolios. Governments too are giving SRI more attention and, in some countries, are discussion whether and how to regulate the SRI market. Advocacy groups are targeting SRI projects through media campaigns using political discourse. Many of the pertinent questions that come with these perplexities are of the philosophical or ethical type and concern legitimisation, demarcation of responsibilities, interpretation of norms and policy formulation. The inclusion of non-financial criteria into investment decision-making leads to a ‹puzzle in SRI’ for which this article offers a solution. The puzzle arises when the day-to-day implementation of an SRI-policy coincides with the process of administering justice. Three questions make up that puzzle: (1) what should an␣investor do when allegations arise about a corporation, (2) what should an investor do when a corporation is brought before a court, (3) what should an investor do when a corporation is found guilty by a court. This article argues, by distinguishing between the rationality of the investor and that of the judge, that allegations, court cases or court verdicts should not be reasons to disinvest from a corporation. This article offers examples from investor practice and points out in which way allegations, court cases and court verdicts make sense for investor behaviour.

This study analyses the yield movements of green bonds and municipal bonds in the United States over the past decade. The main hypothesis of the research is that green bonds have lower average yields compared to conventional municipal bonds. The study utilizes data from the S&P U.S. Municipal Green Bond Index and the S&P U.S. Municipal Bond Index. The research methodology includes descriptive statistics, correlation analysis, and hypothesis testing (F-test and Ttest). The results show a high positive correlation between the yields of green and conventional municipal bonds, indicating similar market behaviour. At the same time, the results suggest that green municipal bonds have slightly lower average yields than conventional municipal bonds, but this difference is not statistically significant. These findings are consistent with some previous studies that found no significant difference in yields between green and conventional bonds. Possible reasons for this include the lack of difference in credit risk between green and conventional municipal bonds. The study has certain limitations, such as its focus on a single market (the U.S.) and one segment (local governments), as well as a relatively short time period. Future research could focus on other markets, longer time periods, and alternative methods of analysis.

PurposeDespite the benefits of international diversification, the home equity bias phenomenon is well documented in the portfolio choice literature. The purpose of this paper is to investigate whether the same investment behavior applies to domestic socially responsible investments (SRIs) where ethical screenings should be the selection criteria.Design/methodology/approachThe authors apply the model by Coval and Moskowitz (1999), Grinblatt and Keloharju (2001) and Agarwal and Hauswald (2010) to uncover the effect of distance relative to screenings on SRI domestic portfolio choice. For the first time, the authors test the robustness of distance effect by using time bias, which is the travel time between the fund manager and the company’s headquarter.FindingsThe authors find that SRIs exhibit a strong preference for locally headquartered firms. After controlling for screening activity and other fund characteristics, the authors still find a strong distance bias in SRI fund portfolio decision-making. The authors find that this bias is mostly observed in SRI fund with social screening and that fund holding characteristics determine the propensity of fund managers to invest locally. The results suggest that the local bias puzzle exists in SRI.Research limitations/implicationsThis study provides avenue for future research to examine whether the same local bias is found in SRI investment in other countries where they have different characteristics and behavior. Also, the evidence that local bias exists in SRI investment may need further analysis as to whether this is conflicting with the objectives of SRI, which focus more on ethical beliefs.Practical implicationsThe results suggest that many local firms in the same city currently held by an SRI fund will not be held by this fund if it is in another city. The implications of the findings are that geographic proximity, along with ethical screenings, is an important dimension to how SRI fund invests.Originality/valueThis study is the first that examines local bias in SRI funds by using portfolio holding data.

The heterogeneous reaction of green and conventional bonds to exogenous shocks and the hedging implications

Socially responsible investing (SRI) or sustainable, responsible, and impact investing is growing fast. The net total of SRI assets at the beginning of 2018 was USD 12.0 trillion. There is extensive literature on SRI, but very little of it relates to portfolio construction and risk management combining SRI and commodities. In this paper, the authors pay attention to model volatility and dynamic conditional correlations between SRI investment and selected representative of commodities. We state the following hypothesis: the potential to create portfolio and risk management opportunities exists between SRI and commodities such as grain, precious metals, and industrial metals. To verify this, modeling of volatility and dynamic conditional correlation (DCC) between pair of elements is necessary. Empirical research conducted for the global market based on selected indices for SRI and commodities confirms this hypothesis. These results can improve asset selection in portfolio construction and allow investors to make more reasonable decisions.

Portfolio diversification benefits of Islamic investors with their major trading partners: Evidence from Malaysia based on MGARCH-DCC and wavelet approaches

The financial market integration is important for the investors to have the portfolio diversification of their investment. The investors do the portfolio diversification to the market where they can have higher return with lower risk.The purpose of the paper is to analyse portfolio diversification opportunities among Asian Developed, Emerging and Frontier markets.The study is performed using various methods such as Correlation, Granger causality test, Johansen cointegration test, Portfolio diversification analysis using various diversification strategies. The study examines portfolio diversification opportunities by comparing non-diversified portfolio (home market) with diversified portfolios (Equal Weighted Portfolio, Minimum Variance Portfolio and Maximum Sharpe Portfolio). The gain from the portfolio diversification was also analyzed to measure the benefits of the diversification. The study found that the lack of integration among many markets proves the existence of the portfolio diversification opportunity. Study is unique in a nature that it examines the portfolio diversification benefits for the investors in developed, emerging and frontier markets, as past studies were limited to developed markets only.The study concluded that the investors can gain better return, lower risk and higher Sharpe with portfolio diversification in international market. The researchers can examine in future the portfolio diversification benefits with other frontier and emerging markets for the investors of the developed markets.

Socially responsible investment (SRI): selection of investment portfolios with regard to ethical and social criteria in addition to conventional financial considerations, is often considered to bring reduced financial performance, although empirical evidence is inconclusive. Five possible sources of divergence in the performance of socially responsible and conventional investments have been proposed in the literature, and are further examined here. Two proposed mechanisms (the ‘anticipation effect’ and the ‘positive selection effect’) describe firms in which investment is potentially made. Since such opportunities are available to all investors, these are unlikely sources of systematic divergence. Concern (the ‘diversification effect’) that SRI constraints prevent adequate portfolio diversification is shown to be ill founded. The greater proportion of smaller companies in SRI portfolios links to an ongoing debate regarding the ‘small companies effect’, in which smaller companies have at times appeared to have superior (and more recently, inferior) performance, while other studies suggest that this is merely an artefact of the methodology used. It is argued that none of the above provides a basis for expectations of inferior SRI performance. Furthermore, SRI portfolio managers gather additional company information and also increasingly engage in dialogue with companies. It is argued that this ‘information effect’ is a possible source of superior SRI performance.

Purpose – Socially responsible property investment (SRPI) has taken on increased significance in recent years, as property investors have given an increased priority to environmental, social and governance issues in their property investment decision making. The purpose of this paper is to establish SRPI performance indices for UK property companies and empirically benchmark their risk‐adjusted performance and portfolio diversification benefits over recent years.Design/methodology/approach – Using five socially responsible investment (SRI) performance eligibility criteria, the UK property companies contributing to these SRI measures are identified. These UK property companies are used to establish a number of SRPI market cap‐weighted performance indices over 2003‐2008. These SRPI performance indices are used to assess the risk‐adjusted performance and portfolio diversification benefits of UK SRPI property companies.Findings – This paper objectively identifies the UK property companies actively involved in...