Investor Sentiment and Volatility Spillovers Between Socially Responsible and Traditional Funds in South Africa

This study examines whether investor sentiment drives volatility spillovers between socially responsible and traditional mutual funds. The rapid growth of responsible investing in emerging markets raises questions about whether higher costs deliver improved risk or diversification benefits, particularly in volatile, behaviourally driven settings. Using a sentiment-augmented Diebold–Yilmaz connectedness framework, a composite sentiment index is constructed from global and local indicators. The results show that spillovers are time-varying and regime-dependent. During periods of stress and pessimism, responsible funds act as net transmitters of volatility, while traditional funds absorb shocks. In bullish conditions, volatility transmission weakens. Overall, connectedness shifts across market states, and socially responsible funds do not consistently provide stabilising or diversification benefits, as these depend on prevailing sentiment and risk conditions. This study provides new evidence on how sentiment-driven volatility spillovers are transmitted between socially responsible and traditional funds in South Africa, with implications for systemic risk and ESG investment costs.