Extreme return connectedness and portfolio implications among environmental/sustainability tokens, ESG ETFs and other assets

This paper examines the extreme return connectedness between environmental/sustainability tokens, ESG ETFs, and other assets. The Quantile Vector Autoregression (QVAR) approach of Chatziantoniou et al. (2021) reveals that asset return connectedness is event-dependent and varies across market states. In normal market situations, environmental/sustainability tokens are weakly connected to other assets, indicating that these tokens provide portfolio diversification benefits. In particular, environmental/sustainability tokens are effective shock receivers. However, as the asset linkages surge during extreme market downturns and upturns, the diversification capabilities of environmental/sustainability tokens decline. The results of the semi-parametric Minimum-CVaR measure show that environmental/sustainability tokens offer a cost-effective hedge against tail risks in bilateral portfolios. Finally, the dynamic minimum variance portfolio (MVP) outperforms other portfolio strategies by generating the highest risk-adjusted return.