Modeling volatility and conditional correlations between socially responsible investments,gold and oil |
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| Institution: | 1. Newhuadu Business School, Minjiang University, Fuzhou 350108, China;2. Collaborative Innovation Center for Energy Economics and Energy Policy, China Institute for Studies in Energy Policy, Xiamen University, Xiamen, Fujian, 361005, PR China;3. China Center for Energy Economics Research, College of Economics, Xiamen University, Xiamen 361005, China;4. Department of Economics, University of Liberia, Capitol Hill, Monrovia, Liberia;5. Wang Yanan Institute for Studies in Economics, Xiamen University, Xiamen 361005, China;6. School of Business, University of Cape Coast, Cape Coast, Ghana |
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| Abstract: | Socially responsible investing (SRI) is one of the fastest growing areas of investing. While there is a considerable literature comparing SRI to various benchmarks, very little is known about the volatility dynamics of socially responsible investing. In this paper, multivariate GARCH models are used to model volatilities and conditional correlations between a stock price index comprised of socially responsible companies, oil prices, and gold prices. The dynamic conditional correlation model is found to fit the data the best and used to generate dynamic conditional correlations, hedge ratios and optimal portfolio weights. From a risk management perspective, SRI offers very similar results in terms of dynamic conditional correlations, hedge ratios, and optimal portfolio weights as investing in the S&P 500. For example, SRI investors can expect to pay a similar amount to hedge their investment with oil or gold as investors in the S&P 500 would pay. These results can help investors and portfolio managers make more informed investment decisions. |
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