ABSTRACT
The aim of the study is to investigate the evidence of information asymmetry, dynamic connectedness, and volatility spillover among ESG equity indices of emerging market economies. Using Sign bias test and GARCH family models, the study finds that ESG equity indices have a leverage effect, significantly impacted by bad news over good news shock. The study has used FIGARCH model to measure the persistence of long‐memory effects across the emerging market. Further, to ensure the interconnection between ESG equity indices that may arise due to the persistence of long‐memory effects, the stusy has examined estimates of TVP‐VAR, and finds moderate interconnection between ESG equity indices. To be specific, ESG equity indices of the Philippines, Indonesia, Korea, Singapore, and India are more sensitive to receiving any sustainable innovation shocks from Brazil, South Africa, and Mexican ESG indices. The study finds significant bidirectional relationships between the ESG equity indices of “Philippines and Brazil,” “Indonesia and India,” and “South Africa and Mexico” that may lead to the spreading of market contagion in the presence of more substantial leverage effects with a long memory. This research offers insights for investors to consider sustainable equity assets for efficient portfolio diversification, mitigating environmental, social, and governance risks associated with volatility spillovers and dynamic connectedness. Policymakers may refer the findings of the study to design effective ESG regulations, for reducing risk in global financial system. Since the pandemic has produced more economic and financial instability in emerging markets, investors and regulators may pay more attention to return and volatility connectivity among ESG equity indices and financial markets to safeguard investment and restore market stability.
