Modelling Risk Spillovers in Environmental Finance

Environmental issues have become increasingly important in economic research and policy for sustainable development. Such issues are tracked by the Dow Jones Sustainable Indexes (DJSI) through financial market indexes that are derived from the Dow Jones Global Indexes. The environmental sustainability activities of firms are assessed using criteria in three areas, namely economic, environmental and social. Risk (or uncertainty) is analysed empirically through the use of conditional volatility models of investment in sustainabilitydriven firms that are selected through the DJSI. This paper analyses the trends and volatility in DJSI indexes using daily data from 31 December 1998 to 1 March 2004. The conditional variance of the DJSI indexes is analysed using three multivariate GARCH models, namely CCC, VARMA-GARCH and VARMA-AGARCH. These models are able to capture the dynamics in the conditional variance and the existence of risk spillovers in the DJSI indexes.