Assessing downside and upside risk spillovers across conventional and socially responsible stock markets ☆ Hachmi Ben Ameur a , Fredj Jawadi b, * , Nabila Jawadi c , Abdoulkarim Idi Cheffou d a INSEEC Business School, France b University of Lille, Office B655, 104 Avenue du Peuple Belge, Lille, 59004, France c IPAG Business School, IPAG LAB, France d EDC Paris Business School, France ARTICLE INFO Keywords: Systemic risk Risk transmission Socially responsible market Value at risk Conditional value at risk JEL codes: C22 G15 ABSTRACT Since the aftermath of the recent global financial crisis, socially responsible (SR) investments have become an alternative form of conventional finance, giving rise to further systemic risk between conventional and SR stock markets. In this paper, we assess this risk transmission using Value at Risk (VaR) modeling for the US, Europe and the Asia-Pacific region, over the period covering January 2004–December 2016. We find that socially responsible stock markets exhibit less risk than do conventional markets in terms of the risk hedging properties induced by the SR screening. Second, contributions to systemic risk vary across market phases and return distribution levels, with a larger contribution and spillover effect during the recent global financial crisis. For example, at the downside of the distribution (CoVaR at 5%), the conventional European index shows the highest contribution to the world market’s systemic risk, while the US stock market shows the highest contribution at the upside of the distribution (CoVaR at 95%). This finding is justified by the difference in the risk aversion of investors that varies with the market state as well as the disparities in the development of SR markets. 1. Introduction Capitalism is well-known as an economic system characterized by the private ownership of capital and a free market. This economic system was expected to help owners operate their firms by guaranteeing the best prices and products while maximizing profits. To ensure its success, the paradigm of capitalism known as “laissez faire” requires the government to adopt a “hands-off” approach to the market, allowing it to ensure the optimal allocation of production factors. Capital accumulation, voluntary exchanges, and market competition have been considered the key prin- ciples of capitalism for several decades. Since the 1990s, this philosophy has generated the widespread phenomena of market deregulation, liberalization, and integration. Capitalism has also induced a rapid evo- lution of financial systems and unprecedented high levels of financial markets (Shiller, 2000), making conventional finance one of the best ways to maximize wealth, although not without risk. Nevertheless, several financial crises have occurred (the Asian stock market crisis in 1997, the Internet bubble in 2000, the subprime crisis in 2007, and the global financial crisis in 2008–2009), somewhat bringing an end to the “laissez-faire” rule. These crises generated significant losses for investors and markets, leading to bankruptcies, a global economic recession, and downturns in several developed and emerging economies. Recent facts have pointed to the contradictions and limitations of capi- talism, perfect markets, and the rational expectations hypothesis. In particular, the recent global financial crisis highlighted the failure of capitalism to develop a viable financial regime and suggested that capi- talism might be self-destructive. Accordingly, conventional financial systems have been severely crit- icized, leading to calls for reform of the financial system and to democ- ratize and humanize finance (Kroszner and Shiller, 2009). This has yielded several alternative forms of capitalism with more social, moral, and responsible values as ways to secure sustainable business and limit financial risks. This has also resulted in a return to socialism and general support for public ownership and government control. ☆ We would like to thank the Co-Editor Professor Sushanta Mallick and two anonymous referees for their very constructive comments and suggestions on an earlier version, as these comments and suggestions helped us significantly improve the paper. We would like also to thank the participants at the Computational and Financial Econometrics Conference (London) for their constructive comments. * Corresponding author. E-mail address: fredj.jawadi@univ-lille.fr (F. Jawadi). Contents lists available at ScienceDirect Economic Modelling journal homepage: www.journals.elsevier.com/economic-modelling https://doi.org/10.1016/j.econmod.2019.09.023 Received 9 December 2018; Received in revised form 13 September 2019; Accepted 14 September 2019 Available online xxxx 0264-9993/© 2019 Elsevier B.V. All rights reserved. Economic Modelling xxx (xxxx) xxx Please cite this article as: Ben Ameur, H. et al., Assessing downside and upside risk spillovers across conventional and socially responsible stock markets, Economic Modelling, https://doi.org/10.1016/j.econmod.2019.09.023