Monetary policy uncertainty, systemic risk, and European sustainable markets

Abstract

This paper examines the predictive role of macro-financial uncertainty in determining the returns of European sustainability indices. Using daily data from October 2008 to December 2023 for eight (8) Dow Jones Sustainability Indices (DJSI) and the European composite, we assess the forecasting power of monetary policy uncertainty (MPU), financial market volatility (VSTOXX), and systemic risk (CISS). Employing the Westerlund and Narayan (2015) predictive regression framework, we account for predictor persistence, endogeneity, and conditional heteroskedasticity, and extend the model to capture potential asymmetries in return responses. The results show that MPU provides the most pervasive predictive information across the sustainability markets, whereas the effects of VSTOXX and CISS are more market-specific. The economic magnitude of the CISS effect is also generally limited. Allowing for asymmetric responses improves forecast accuracy in selected markets, particularly for MPU-based models and under the longer rolling estimation window, although the gains are not uniform across predictors or countries. Forecast performance is assessed using RMSE, MAE, and the Campbell and Thompson results relative to symmetric and conventional time-series benchmarks. The findings indicate that European sustainability indices remain exposed to macro-financial repricing risk and should not be regarded as uniformly defensive assets. They also have implications for monetary policy communication, financial stability monitoring, and ESG portfolio allocation under uncertainty.