Sustainable Indices Outperforming Traditional Indices in India: A Comparative Study Pre and During COVID-19

This study aims to compare the performance of sustainable indices with the traditional indices of Indian stock markets, both before and during the COVID-19 pandemic in terms of risk, return, and volatility. The findings indicate that sustainable indices consistently outperform traditional indices regarding risk, returns, and volatility aspects during the COVID-19 crisis. The examination of volatility reveals the presence of significant internal volatility and asymmetric effects within the indices. Further, the Asymmetric VAR-BEKK-GARCH model uncovers a bi-directional volatility spillover between the indices before the COVID-19 period while a unidirectional volatility spillover is observed during the COVID-19 period. The connectedness approach using the TVP-VAR-based Diebold &Yilmaz model shows that sustainable indices are the net transmitters and traditional index is the net receiver of volatility spillover. Moreover, various asset pricing market factors like market premium, Small Minus Big (SMB), High Minus Low (HML), and Winners Minus Losers (WML) are driving the better performances of sustainable indices during the crisis period. Consequently, investors may consider including sustainable indices, funds, ETFs, and stocks as viable alternatives to traditional indices to diversify their portfolios during crisis periods. This analysis supports the Modern Portfolio Theory (MPT), and the ‘flight-to-safety’ phenomenon during a crisis, and aligns financial goals with Environmental, Social, and Governance (ESG) considerations.