Arthavaan, Vol 7, Issue 1, December 2024

Empirical Investigation into Long Run and Causal Relationship Between Sustainability and Benchmark Indices in Indian Stock Market

Nishi Sharma, Associate Professor, Bhim Rao Ambedkar College, University of Delhi

DOI:10.71322/arthavaan.vol.7.issue.1.05

Amidst the growing concern about climate change, many investors worldwide believe that adopting sustainable business practices has a positive impact on stock prices in the long run. In light of this, the present study explores the dynamic connectedness between the sustainability index and the benchmark equity market index in India. For this purpose, the two indices from the popular stock market in India, namely, the Bombay Stock Exchange, are selected. The BSE 100 ESG symbolizes the sustainability index, and the BSE 100 index represents a broader benchmark of the Indian equity market. The two indices are initially analysed along the risk and returns parameters using daily closing prices from 1 January 2018 to 30 September 2024, obtained from the Bombay Stock Exchange of India portal. The data set consists of 1672 observations covering six years and nine months. The study further examines the cointegrating and causal behaviour of the two indices. For modelling the intertwined dynamics of the two variables in the long run, the popular cointegration techniques, namely, the Engle-Granger and Johansen Cointegration methods, are applied. Further, the cause-effect relationship between the indices in the short run is investigated using the Granger Causality approach. The data is stationary at the first difference, I (1), as per the Augmented Dickey-Fuller (ADF) unit root test. The study results support cointegration between the ESG and BSE indices in the long run. However, no Granger causality exists between the two. The serial correlation, heteroskedasticity, and model stability diagnostic tests are performed satisfactorily. The research has theoretical as well as practical implications. It enriches the existing literature by providing empirical insights into the dynamic relationships between sustainability and stock market indices, focusing on the Indian market. The fund managers and investors engaged in pair trading in the stock market can make informed decisions using the cointegrating knowledge evidenced by this research. Further, lawmakers can use the findings to design or reframe the market policies to motivate businesses and investors for ESG-oriented investment

Keywords: Cointegration, Sustainability, ESG 100 index, BSE 100 index, Causality