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Published online: 2 December 2019

Academy of Economics and Finance 2019

Abstract

Within a VAR(1)-FIEGARCH framework, we explore the dynamic impact of uncertainty as measured by US Economic Policy Uncertainty Index on the level of fractional integration of ethical investments and conventional investments for Europe, the American and Asia-Pacific market. Our results reveal that both spillovers and policy uncertainty appear to capture a significant part of the returns fractional integration process for ethical and conventional investments. Overall, our results support the view that ethical and conventional investments returns conform to a fractionally integrated process. Our results entail significant policy implications for investors who seek profitable trading strategies.

Keywords Ethical investments . Policy uncertainty. Risk analysis. Fractional integration

JEL Classification C1.G1

(ProQuest: ... denotes formulae omitted.)

1Introduction

Ethical investments have been in the epicenter of global investing over the last decades as reflected in the growth of total assets under management. Although interest in ethical investments has marked an astonishing growth fueled mainly from diversification considerations, the existence of the long memory and mean reversion are issues that have not yet been investigated. In particular, investors decisions might be largely affected by the presence of fractional cointegration between ethical and conventional stock market investments. Long term co-memories and irregular long cycles that would affect long-term investors allocation decisions are commonly encountered in fractionally integrated series. A significant strand of literature that dates back to the seminal study of Mandelbrot (1971) highlight that in the presence of long memory in the conventional stock market returns the asset pricing models based on standard testing procedures are rendered fragile (e.g. Gil-Alana 2006).

With the above in mind, we homed in on significant evidence that the volatilities of financial asset prices decay more slowly than standard GARCH models and to this end volatilities should be modeled through stationary fractional processes - see inter alia Baillie et al. (1996) and Ding and Granger (1996). To the best of our knowledge, only the study of Roca et al. (2010) examines the level of integration within ethical investment markets. As in Schr der (2007), we set off to conduct the empirical tests on a broad set of known ethical investment indexes and their conventional counterparts.

Our emphasis on indexes fractional integration features...

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