Returns and volatility of water investments

Abstract

This study analyzes the stock returns and volatility of the global water industry in different (full, pre-GFC, GFC and post-GFC) periods. The study estimates ARMA (1, 1)-GARCH (1, 1) and EGARCH (1, 1) models on the World Water index (WOWAX), S-Network Global Water Index (S-Net), S&P Global Water Index (S&P), and MSCI ACWI Water Utilities Index (MSCI ACWI), the Asia, Europe, Latin America and US water markets, Pictet Global Water Fund (Pictet), and KBC Eco Water Fund (KBC Eco) for the period 2004-2014. In this study, the EGARCH (1, 1) model results suggest the existence of persistence of volatility from four water indices, four water markets and two water funds in different periods and asymmetric volatility (leverage) for Asia and US, S-Net and Pictet in full, pre-GFC and GFC periods and for WOWAX in GFC and post-GFC periods. The WOWAX is not highly correlated with water markets and water funds, which suggests that it may provide a possible opportunity for portfolio diversification in different periods.Some important findings of this study are noted as follows. We find that water indices, water markets, and water funds are correlated with each other. However, the results show that WOWAX provides an opportunity of portfolio diversification benefits to investors in different (full, pre-GFC, GFC, and post-GFC) periods which is in line with Jin, Roca, Li, Wong, and Cheung's (2015) results. It is notable that the ARMA (1, 1)-GARCH(1, 1) model results show that the conditional volatility process GARCH (1, 1) has a positive effect on the serial autocorrelation of squared residuals for water indices, water markets and water funds in full, GFC and post-GFC periods. Again, EGARCH (1, 1) model results show the significance of β and γ, suggesting persistence of volatility from four water indices, four water markets, and two water funds in different periods (full, pre-GFC, GFC and post-GFC) and asymmetric volatility (leverage) for S-Net, Asia and US and Pictet in the full, pre-GFC and GFC periods, and WOWAX in the GFC and post-GFC periods.This study has a number of significant contributions to the current literature. Firstly, it is the first study to investigate the relationships between returns and volatility of the water indices, water markets, water funds, and water markets in different (full, pre-GFC, GFC, and post-GFC) periods. Secondly, this study searches for the existence of correlations and dynamic relationships in water indices, water markets and water funds with shareholders' value in the global water industry. Thirdly and importantly, in a qualitative manner, this study addresses the value relevance of markets, which has a profound impact on the water industry in relation to water funds, water indices, and their components.The rest of this paper is organized as follows. Section 2 presents a further institutional background. Section 3 reviews the related literature. Section 4 discusses our research hypothesis. Section 5 outlines the data and methodologies employed in the study. Section 6 analyzes the empirical resul...

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“…This implies that volatility shocks are quite persistent (see Reza et al, 2018). The Variance Equation (lngarch) w (0.2005) value implies that the EGARCH model accommodates the effect of any nontrading periods and predictable information releases or forecastable events accumulate at a rate of 43%.…”

“…Finally, Reza et al (2018) analyzed stock returns and volatility of the global water industry. The study estimated ARMA (1, 1)-GARCH (1, 1) and EGARCH (1, 1) models on the World Water index (WOWAX), S-Network Global Water Index (S-Net), S&P Global Water Index (S&P), and MSCI ACWI Water Utilities Index (MSCI ACWI), the Asia, Europe, Latin America and US water markets, Pictet Global Water Fund (Pictet), and KBC Eco Water Fund (KBC Eco) for the period 2004-2014.…”

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“…The other studies who have analyzed the volatility spillover relationship concluding similar results are Worthington and Higgs (2004) (Asian markets); Kaur (2004) (India and USA); Wang et al (2005) (USA, Japan and South Asian market); Rao (2008) (Arabian Gulf Cooperation Council equity markets); Nath Mukherjee and Mishra (2010) (India, Hong Kong, Korea, Singapore and Thailand, Malaysia and Sri Lanka, China, Indonesia, Japan, Pakistan, Taiwan); Pati and Rajib (2011) (India); Joshi (2011) (India, Hong Kong, Japan, China, Indonesia, Korea); Islam and Mahkota (2013) (Malaysia, Indonesia and Singapore); Singhania and Anchalia (2013) (India, China, Hong Kong, Japan); and Reza et al (2018) (water indices of Asia, Europe, Latin America and US market).…”

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