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Do extreme-risk spillovers improve ESG portfolio selection?

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  • Zhang, Shuya
  • Yang, Yajie
  • Cai, Jianfeng

Abstract

This paper examines whether extreme-risk spillover information improves ESG-based portfolio selection. Using daily stock returns for firms in China, the United States, and the United Kingdom from 2014 to 2020, we construct annual firm-level tail-risk connectedness measures, proxied by normalized degree centrality in Granger-causality-in-risk networks. The results demonstrate that the incremental value of extreme-risk information is market-specific. In the US and the UK, high-ESG portfolios outperform low-ESG portfolios in risk-adjusted terms, while the inclusion of extreme-risk information has limited effect. In contrast, in China, ESG ratings alone are less informative, but portfolio performance improves when ESG ratings are combined with tail-risk connectedness. These findings suggest that the effectiveness of ESG ratings in portfolio selection depends on the market environment. Incorporating extreme-risk spillover information can enhance portfolio selection when ESG ratings provide limited insight.

Suggested Citation

  • Zhang, Shuya & Yang, Yajie & Cai, Jianfeng, 2026. "Do extreme-risk spillovers improve ESG portfolio selection?," Finance Research Letters, Elsevier, vol. 104(C).
    • Handle: RePEc:eee:finlet:v:104:y:2026:i:c:s1544612326007518
    DOI: 10.1016/j.frl.2026.110223
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