The behavior of green exchange‐traded funds
Abstract
Purpose
The purpose of this paper is to investigate green exchange‐traded funds (ETFs) and propose a market‐wide proxy for green returns and a green volatility factor.
Design/methodology/approach
Identifying a unique sample of green funds, this paper investigates the time‐series behavior of returns for these investment vehicles and their associated conditional volatility dynamics via GARCH methodology. In this study, green ETFs are defined as index funds replicating market indices that invest in stocks exhibiting positive environmental, social, and governance characteristics.
Findings
Cumulative market‐wide green returns are found to be positive from inception year 2005 through 2008. Estimating a t‐GARCH (1,1) specification, the author finds strong evidence in favor of volatility persistence for the 15 green ETFs identified in this study. Additionally, the results suggest that a 1 percent volatility‐based value‐at‐risk forecast ranges from $24,150 through $26,000 on a daily basis. Finally, the empirical evidence provides support for weak‐form market efficiency when examining the green universe of stocks.
Research limitations/implications
Green ETFs are relatively recent financial instruments and exhibit important implications for volatility timing strategies and the cross‐section of green stock returns.
Practical implications
Knowledge of green price behavior is important in constructing optimal hedging and risk management strategies.
Social implications
Green ETFs provide a natural channel for sustainable investing.
Originality/value
Green ETFs exhibit the advantage of including many companies that have undertaken positive measures towards the global environment in their respective business models. This paper provides the first investigation of green ETFs.
Keywords
Citation
Sabbaghi, O. (2011), "The behavior of green exchange‐traded funds", Managerial Finance, Vol. 37 No. 5, pp. 426-441. https://doi.org/10.1108/03074351111126915
Publisher
:Emerald Group Publishing Limited
Copyright © 2011, Emerald Group Publishing Limited