Time-frequency connectedness between the ESG global indices and GCC equity markets: policy implications using the TVP-VAR model

Abstract

Purpose This study aims to explore the dynamic connectedness between environmental, social and governance (ESG) global indices and the equity markets of Gulf Cooperation Council (GCC) countries. The research addresses a gap in understanding how ESG-related shocks propagate through the GCC financial systems, offering valuable insights for investors and policymakers navigating the region’s sustainability and market integration agenda. Design/methodology/approach This study uses a time-varying parameter vector autoregressive (TVP-VAR) model integrated with a frequency connectedness framework. It uses daily data from 2014 to 2024, covering the S&P 500 Index, S&P Global 1200 ESG Index, S&P Green Bond Index, S&P Global Clean Energy Index, alongside equity markets from six GCC countries; the inclusion of the S&P 500 Index as a benchmark. This approach allows for the decomposition of volatility transmission across short- and long-term horizons, capturing the evolution of market interactions over time and across frequency bands. Findings The empirical results reveal significant short-term volatility spillovers from global ESG indices to GCC equity markets, particularly during systemic events such as the COVID-19 pandemic. The S&P 500 index and ESG indices are identified as dominant net transmitters of volatility, while Saudi Arabia and the UAE serve as key regional transmitters. In contrast, markets like Kuwait and Bahrain act as net receivers. Long-term spillovers, although less intense, indicate the gradual influence of green finance instruments such as the Green Bond and Clean Energy indices. Originality/value This is among the first studies to apply TVP-VAR in examining ESG–GCC equity market connectedness. It highlights how ESG-driven volatility shapes short- and long-term investment dynamics in resource-based emerging markets.