IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v53y2023ics1544612322007747.html
   My bibliography  Save this article

ESG tail risk: The Covid-19 market crash analysis

Author

Listed:
  • Lashkaripour, Mohammadhossein

Abstract

This paper shows that strong ESG taste leads to higher tail risk in high-ESG (green) stocks compared to low-ESG (brown) stocks during market crashes. In crash episodes, strong ESG tastes induce investors to hold green stocks despite negative expected returns. Logically, the non-pecuniary benefit from ESG investing compensates for the dis-utility of financial loss. This expectation of price declines makes put options on green stocks more expensive and increases tail risk. I conduct a pseudo-causal analysis on the COVID-19 market crash that supports these theoretical findings. My findings provide novel implications for portfolio selection and risk management with ESG consideration.

Suggested Citation

  • Lashkaripour, Mohammadhossein, 2023. "ESG tail risk: The Covid-19 market crash analysis," Finance Research Letters, Elsevier, vol. 53(C).
    • Handle: RePEc:eee:finlet:v:53:y:2023:i:c:s1544612322007747
    DOI: 10.1016/j.frl.2022.103598
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612322007747
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2022.103598?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Pástor, Ľuboš & Stambaugh, Robert F. & Taylor, Lucian A., 2021. "Sustainable investing in equilibrium," Journal of Financial Economics, Elsevier, vol. 142(2), pages 550-571.
    2. Bryan Kelly & Ľuboš Pástor & Pietro Veronesi, 2016. "The Price of Political Uncertainty: Theory and Evidence from the Option Market," Journal of Finance, American Finance Association, vol. 71(5), pages 2417-2480, October.
    3. Stefano Ramelli & Alexander F Wagner, 2020. "Feverish Stock Price Reactions to COVID-19," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 9(3), pages 622-655.
    4. Kanamura, Takashi, 2021. "Risk Mitigation and Return Resilience for High Yield Bond ETFs with ESG Components," Finance Research Letters, Elsevier, vol. 41(C).
    5. Tim Bollerslev & Viktor Todorov, 2011. "Tails, Fears, and Risk Premia," Journal of Finance, American Finance Association, vol. 66(6), pages 2165-2211, December.
    6. Stefano Ramelli & Alexander F. Wagner, 2020. "Feverish Stock Price Reactions to COVID-19," Swiss Finance Institute Research Paper Series 20-12, Swiss Finance Institute.
    7. Rui Albuquerque & Yrjo Koskinen & Shuai Yang & Chendi Zhang, 2020. "Resiliency of Environmental and Social Stocks: An Analysis of the Exogenous COVID-19 Market Crash," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 9(3), pages 593-621.
    8. Rui Albuquerque & Yrjö Koskinen & Chendi Zhang, 2019. "Corporate Social Responsibility and Firm Risk: Theory and Empirical Evidence," Management Science, INFORMS, vol. 65(10), pages 4451-4469, October.
    9. repec:aud:audfin:v:21:y:2019:i:51:p:422 is not listed on IDEAS
    10. Zhang, Dongyang & Lucey, Brian M., 2022. "Sustainable behaviors and firm performance: The role of financial constraints’ alleviation," Economic Analysis and Policy, Elsevier, vol. 74(C), pages 220-233.
    11. Shieh-Liang Chen & Cheng-Kun Liu & Chia-Ying Liu, 2019. "Corporate social responsibility, employee productivity and firm valuation," International Journal of Business Excellence, Inderscience Enterprises Ltd, vol. 19(2), pages 285-303.
    12. Pedersen, Lasse Heje & Fitzgibbons, Shaun & Pomorski, Lukasz, 2021. "Responsible investing: The ESG-efficient frontier," Journal of Financial Economics, Elsevier, vol. 142(2), pages 572-597.
    13. Zolotoy, Leon & O'Sullivan, Don & Chen, Yangyang, 2019. "Local religious norms, corporate social responsibility, and firm value," Journal of Banking & Finance, Elsevier, vol. 100(C), pages 218-233.
    14. Brenner, Menachem & Izhakian, Yehuda, 2018. "Asset pricing and ambiguity: Empirical evidence⁎," Journal of Financial Economics, Elsevier, vol. 130(3), pages 503-531.
    15. Wagner, Alexander F. & Ramelli, Stefano, 2020. "Feverish Stock Price Reactions to COVID-19," CEPR Discussion Papers 14511, C.E.P.R. Discussion Papers.
    16. Yifan He & Wenfang Lin & Justas Streimikis, 2019. "Linking Corporate Social Responsibility with Reputation and Brand of the Firm," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 21(51), pages 422-422.
    17. Yu, Huaibing, 2022. "Does sustainable competitive advantage make a difference in stock performance during the Covid-19 pandemic?," Finance Research Letters, Elsevier, vol. 48(C).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. James, Nick & Menzies, Max, 2023. "An exploration of the mathematical structure and behavioural biases of 21st century financial crises," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 630(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Eisenkopf, Jana & Juranek, Steffen & Walz, Uwe, 2021. "Responsible investment and stock market shocks: Short-term insurance and persistent outperformance post-crisis?," SAFE Working Paper Series 329, Leibniz Institute for Financial Research SAFE.
    2. Ferriani, Fabrizio, 2023. "Issuing bonds during the Covid-19 pandemic: Was there an ESG premium?," International Review of Financial Analysis, Elsevier, vol. 88(C).
    3. Bai, Min & Ho, Ly, 2022. "Corporate social performance and firm debt levels: Impacts of the covid-19 pandemic and institutional environments," Finance Research Letters, Elsevier, vol. 47(PB).
    4. Andrea Jacob & Martin Nerlinger, 2021. "Investors’ Delight? Climate Risk in Stock Valuation during COVID-19 and Beyond," Sustainability, MDPI, vol. 13(21), pages 1-17, November.
    5. Ding, Wenzhi & Levine, Ross & Lin, Chen & Xie, Wensi, 2021. "Corporate immunity to the COVID-19 pandemic," Journal of Financial Economics, Elsevier, vol. 141(2), pages 802-830.
    6. Fariha Jahan & Jungmu Kim, 2023. "Does the Shield Effect of CSR Work in Crises? Evidence in Korea," Sustainability, MDPI, vol. 15(11), pages 1-18, June.
    7. Yi, Yuyang & Zhang, Zongyi & Xiang, Cheng, 2022. "The value of CSR during the COVID-19 crisis: Evidence from Chinese firms," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
    8. Pagano, Marco & Wagner, Christian & Zechner, Josef, 2023. "Disaster resilience and asset prices," Journal of Financial Economics, Elsevier, vol. 150(2).
    9. Christophe Boucher & Wassim Le Lann & Stéphane Matton & Sessi Tokpavi, 2023. "Are ESG ratings informative to forecast idiosyncratic risk?," Working Papers hal-04140193, HAL.
    10. Alexandre Garel & Arthur Petit-Romec, 2021. "Investor rewards to environmental responsibility: Evidence from the COVID-19 crisis," Post-Print hal-03204216, HAL.
    11. Nils Engelhardt & Jens Ekkenga & Peter Posch, 2021. "ESG Ratings and Stock Performance during the COVID-19 Crisis," Sustainability, MDPI, vol. 13(13), pages 1-15, June.
    12. Hasan, Iftekhar & Marra, Miriam & To, Thomas Y. & Wu, Eliza & Zhang, Gaiyan, 2023. "COVID-19 Pandemic and Global Corporate CDS Spreads," Journal of Banking & Finance, Elsevier, vol. 147(C).
    13. Rahman, Md Lutfur & Al Mamun, Mohammed Abdullah, 2021. "How resilient are the Asia Pacific financial markets against a global pandemic?," Pacific-Basin Finance Journal, Elsevier, vol. 69(C).
    14. Giovanni Cardillo & Ennio Bendinelli & Giuseppe Torluccio, 2023. "COVID‐19, ESG investing, and the resilience of more sustainable stocks: Evidence from European firms," Business Strategy and the Environment, Wiley Blackwell, vol. 32(1), pages 602-623, January.
    15. Po‐Hsuan Hsu & Kai Li & Chi‐Yang Tsou, 2023. "The Pollution Premium," Journal of Finance, American Finance Association, vol. 78(3), pages 1343-1392, June.
    16. Florian Heeb & Julian F Kölbel & Falko Paetzold & Stefan Zeisberger, 2023. "Do Investors Care about Impact?," Review of Financial Studies, Society for Financial Studies, vol. 36(5), pages 1737-1787.
    17. Rim El Khoury & Nohade Nasrallah & Khaled Hussainey, 2022. "Exploring the performance of responsible companies in G20 during the COVID-19 outbreak," Post-Print hal-03761427, HAL.
    18. Emre Arat & Britta Hachenberg & Florian Kiesel & Dirk Schiereck, 2023. "Greenium, credit rating, and the COVID-19 pandemic," Journal of Asset Management, Palgrave Macmillan, vol. 24(7), pages 547-557, December.
    19. Ducret, Romain, 2021. "Investors' perception of business group membership during an economic crisis : Evidence from the COVID-19 pandemic," FSES Working Papers 524, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
    20. Andrieș, Alin Marius & Ongena, Steven & Sprincean, Nicu, 2021. "The COVID-19 Pandemic and Sovereign Bond Risk," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:53:y:2023:i:c:s1544612322007747. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.