Rethinking the Leverage Effect in ESG Markets: Asymmetric Volatility of Indian Sustainability Indices Post-COVID-19

Abstract

As environmental, social, and governance (ESG) investing gains global prominence, evaluating the volatility of sustainability indices' returns becomes crucial for modern portfolio management. This study investigates the conditional volatility and asymmetric behavior of three major sustainable indices on the Bombay Stock Exchange (BSE): ESG 100, Carbonex, and Greenex. Utilizing daily closing prices from January 18, 2021, to March 31, 2024, the research specifically focuses on the post-COVID-19 vaccination recovery phase, a relatively underexplored period characterized by economic stabilization and renewed investor optimism. After confirming series stationarity, we applied autoregressive conditional heteroskedasticity (ARCH) and generalized ARCH (GARCH) models to assess volatility persistence. Furthermore, EGARCH and TGARCH models are employed using rigorous model selection criteria, such as the Akaike Information Criterion (AIC) and the Schwarz Information Criterion (SIC), to evaluate asymmetric volatility responses to external market shocks. The empirical results demonstrate that all selected sustainability indices exhibit significant short and long-term volatility persistence, indicating that market shocks have a prolonged impact on these assets. Crucially, the asymmetry models reveal a notable departure from traditional leverage effect theory, namely, positive market shocks and favorable news exert a substantially stronger influence on the volatility of these sustainable indices than negative shocks. This suggests that positive macroeconomic signals disproportionately drive ESG-oriented investments during economic recovery periods. By highlighting these context-sensitive volatility dynamics, this study provides valuable, practical insights for policymakers designing green financial initiatives and for institutional investors seeking robust risk management and portfolio diversification strategies in emerging ESG markets.