RELATIONSHIP BETWEEN ENVIRONMENT-FRIENDLY EQUITIES. EVIDENCE FROM THE NASDAQ OMX GREEN ECONOMIC SECTORAL INDICES

Abstract

The green equity market is experiencing rapid growth, presenting investment opportunities for market participants. This market includes equities from different sectors of the green economy. Understanding the relationships among green equities is essential for effective portfolio diversification and risk management. Hence, due to the limited existing literature on this subject, this study aims to examine the connections among green sector equities by analyzing the daily data of NASDAQ OMX green economic sector indices from 2010 to 2023. In the pre-COVID-19 sample, the correlation analysis indicated a strong interrelationship among energy efficiency, water, green building, and recycling sectors, which also exhibited close connections with nearly all other industries, except bio/clean fuels. On the other hand, the sectors of advanced materials, healthy living, bio/clean fuels, lighting, and natural resources exhibit a moderate degree of correlation among themselves. Following the outbreak of COVID-19, the connections between green equities have become more pronounced. However, the green transportation sector shows a moderate link to other green industries, particularly reflecting a weak correlation with the natural resources and pollution mitigation sectors. Therefore, sectors exhibiting weak to moderate connections can be regarded as viable options for a diversified portfolio. Furthermore, cointegration analysis reveals that there is no long-term equilibrium relationship among the green sectors, indicating that long-term investors with an environmental focus can benefit from favorable diversification opportunities. This research provides several important insights for both investors and policymakers.

Keywords: Green equity market, Green economic sectors, Correlation, Cointegration, Diversification opportunities, COVID-19.