Sustainability Index Analysis using ARIMA & TBATS Approach

Abstract

Traditionally it was thought that a robust equity market and bond market are essential for a stable financial system of a country. But in the rapidly evolving and emerging Indian economy, sustainable investing is also equally important as the investors are becoming socially conscious on their choice of investments. The Indian corporate world is witnessing a growing awareness of sustainability and responsible business practices. Linking the environmental performance with financial performance is of paramount importance to Indian corporate sector. Though the stress is on Innovation, Infrastructure and Investment, companies are expected to be equipped with mitigating and adapting to the climate change to perform better. This study highlights the emerging need for investment in sustainability index along with equity and bond indices. Equity market is represented by NIFTY 50 index and bond market is represented by NIFTY G sec index and Money market index, while sustainability index is represented by NIFTY 100 ESG index. This study aims to compare the market returns of equity, bond and sustainability indices using correlation analysis. Another objective is to check if equity market index is influenced by bond market index and sustainability index using Regression analysis. Further, it forecasts the movements of selected indices using ARIMA and TBATS using R software. The time horizon chosen for this study is a 5-year daily data from 1st Oct 2018 to 31st Oct 2023. The findings of the study shows that there is a correlation amongst equity returns, G-Sec returns and ESG Sustainability index returns, it is also found that only sustainability index has a positive and significant influence on equity returns. Equity returns can be predicted using Auto Arima and G-Sec returns can be predicted using TBATS forecasting technique. Money market returns can be predicted using both Auto Arima and TBATS forecasting techniques. But, both Auto Arima and TBATS do not help in prediction of returns for ESG Sustainability index returns. The findings of the study are imperative to the companies to remain relevant and competitive in the evolving market and investors to earn better returns. JEL code: G17, G10