IDEAS home Printed from https://ideas.repec.org/a/eee/reveco/v88y2023icp27-46.html

Hedging Covid-19 risk with ESG disclosure

Author

Listed:
  • Jin, Yuqian
  • Liu, Qingfu
  • Tse, Yiuman
  • Zheng, Kaixin

Abstract

Covid-19 has led to major changes worldwide and has had a significant impact on market risk. We characterize this uncertainty as innovations extracted from the Covid Risk Index on the Wall Street Journal through a textual analysis of high-dimensional data. We hedge the risk with mimicking portfolios constructed using the ESG (environmental, social, and governance) disclosure score as a measure of firm-level exposure to Covid-19 risk. The hedge portfolios perform well both in and out of sample. We also test the role of ESG in hedging and discover that during the Covid-19 pandemic firms with greater ESG disclosure generate higher returns as well as experience lower downside risk. The further analysis suggests that the portfolio returns can be explained by Covid risk shock and investment inflow, and the hedge effect mainly comes from the social part of ESG.

Suggested Citation

  • Jin, Yuqian & Liu, Qingfu & Tse, Yiuman & Zheng, Kaixin, 2023. "Hedging Covid-19 risk with ESG disclosure," International Review of Economics & Finance, Elsevier, vol. 88(C), pages 27-46.
    • Handle: RePEc:eee:reveco:v:88:y:2023:i:c:p:27-46
    DOI: 10.1016/j.iref.2023.06.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1059056023001648
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.iref.2023.06.002?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

    for a different version of it.

    References listed on IDEAS

    as
    1. Dirk G. Baur & Brian M. Lucey, 2010. "Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds and Gold," The Financial Review, Eastern Finance Association, vol. 45(2), pages 217-229, May.
    2. Lamont, Owen A., 2001. "Economic tracking portfolios," Journal of Econometrics, Elsevier, vol. 105(1), pages 161-184, November.
    3. Samuel M. Hartzmark & Abigail B. Sussman, 2019. "Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows," Journal of Finance, American Finance Association, vol. 74(6), pages 2789-2837, December.
    4. Chemkha, Rahma & BenSaïda, Ahmed & Ghorbel, Ahmed & Tayachi, Tahar, 2021. "Hedge and safe haven properties during COVID-19: Evidence from Bitcoin and gold," The Quarterly Review of Economics and Finance, Elsevier, vol. 82(C), pages 71-85.
    5. Basu, Devraj & Miffre, Joëlle, 2013. "Capturing the risk premium of commodity futures: The role of hedging pressure," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2652-2664.
    6. Zachary Folger-Laronde & Sep Pashang & Leah Feor & Amr ElAlfy, 2022. "ESG ratings and financial performance of exchange-traded funds during the COVID-19 pandemic," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 12(2), pages 490-496, April.
    7. Conlon, Thomas & Corbet, Shaen & McGee, Richard J., 2020. "Are cryptocurrencies a safe haven for equity markets? An international perspective from the COVID-19 pandemic," Research in International Business and Finance, Elsevier, vol. 54(C).
    8. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    9. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(4), pages 1593-1636.
    10. Broadstock, David C. & Chan, Kalok & Cheng, Louis T.W. & Wang, Xiaowei, 2021. "The role of ESG performance during times of financial crisis: Evidence from COVID-19 in China," Finance Research Letters, Elsevier, vol. 38(C).
    11. Karl V. Lins & Henri Servaes & Ane Tamayo, 2017. "Social Capital, Trust, and Firm Performance: The Value of Corporate Social Responsibility during the Financial Crisis," Journal of Finance, American Finance Association, vol. 72(4), pages 1785-1824, August.
    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. Ahad, Muhammad & Imran, Zulfiqar Ali & Shahzad, Khurram, 2024. "Safe haven between European ESG and energy sector under Russian-Ukraine war: Role of sustainable investments for portfolio diversification," Energy Economics, Elsevier, vol. 138(C).
    2. Guo, Kun & Li, Yichong & Zhang, Yunhan & Chen, Yingtong & Ma, Yanran, 2024. "Cross-country risk spillovers of ESG stock indices: Dynamic patterns and the role of climate transition risks," International Review of Financial Analysis, Elsevier, vol. 95(PB).
    3. Yousaf, Imran & Bejaoui, Azza & Ali, Shoaib & Li, Yanshuang, 2024. "Demystifying the dynamic relationship between news sentiment index and ESG stocks: Evidence from time-frequency wavelet analysis," International Review of Financial Analysis, Elsevier, vol. 96(PB).
    4. Liu, Qingfu & Shi, Chen & Tse, Yiuman & Wang, Chuanjie, 2023. "The value of communication during pandemics," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).
    5. Yifan Wu & Ziang Qiu, 2025. "Economic policy uncertainty and enterprise ESG performance: evidence from listed companies in China," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 52(4), pages 989-1014, December.
    6. Talan, Gaurav & Sharma, Gagan Deep & Pereira, Vijay & Muschert, Glenn W., 2024. "From ESG to holistic value addition: Rethinking sustainable investment from the lens of stakeholder theory," International Review of Economics & Finance, Elsevier, vol. 96(PA).
    7. Liu, Qingfu & Shi, Chen & Tse, Yiuman & Zhang, Linlin, 2023. "The impact of public health emergencies on small and medium-sized enterprises: Evidence from China," Global Finance Journal, Elsevier, vol. 58(C).
    8. Janik, Bogna & Płuciennik, Piotr, 2024. "Corporate ESG indices and stability during periods of deep concerns in financial markets," Finance Research Letters, Elsevier, vol. 70(C).
    9. Liu, Qingfu & Tse, Yiuman & Wang, Chuanjie & Yang, Jiaer, 2026. "Hedging financial turbulence risk with textual analysis," Pacific-Basin Finance Journal, Elsevier, vol. 96(C).
    10. Alhajjeah, Diana & Besim, Mustafa & Al-Hajieh, Heitham, 2025. "Mitigating crisis impact: The influence of corporate social responsibility on non-financial firms’ financial performance," International Review of Economics & Finance, Elsevier, vol. 101(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. Marinescu, Ion-Iulian & Mirza, Nawazish & Horobet, Alexandra & Belascu, Lucian, 2025. "Hedging uncertainty: Bitcoin's asymmetric diversification benefits in factor-based portfolios," The Quarterly Review of Economics and Finance, Elsevier, vol. 102(C).
    2. Lei, Heng & Xue, Minggao & Liu, Huiling & Ye, Jing, 2023. "Precious metal as a safe haven for global ESG stocks: Portfolio implications for socially responsible investing," Resources Policy, Elsevier, vol. 80(C).
    3. Mai T. Said & Mona A. ElBannan, 2025. "Stock market reaction to COVID-19 outbreak: evidence from ESG firms in emerging economies," Journal of Asset Management, Palgrave Macmillan, vol. 26(2), pages 136-158, March.
    4. Beatrice Bertelli & Costanza Torricelli, 2024. "The trade-off between ESG screening and portfolio diversification in the short and in the long run," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 48(2), pages 298-322, June.
    5. Lestari, Jenjang Sri & Frömmel, Michael, 2024. "Socially responsible investments: doing good while doing well in developed versus emerging markets?," Research in International Business and Finance, Elsevier, vol. 69(C).
    6. Taskin, Dilvin & Sariyer, Görkem & Acar, Ece & Cagli, Efe Caglar, 2025. "Do past ESG scores efficiently predict future ESG performance?," Research in International Business and Finance, Elsevier, vol. 74(C).
    7. Yang, Junhua & Agyei, Samuel Kwaku & Bossman, Ahmed & Gubareva, Mariya & Marfo-Yiadom, Edward, 2024. "Energy, metals, market uncertainties, and ESG stocks: Analysing predictability and safe havens," The North American Journal of Economics and Finance, Elsevier, vol. 69(PB).
    8. Matthias Muck & Thomas Schmidl, 2026. "Relative to whom? The impact of peer groups on ESG ratings and financial performance," Journal of Asset Management, Palgrave Macmillan, vol. 27(2), pages 1-26, June.
    9. 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.
    10. I-Chun Tsai, 2024. "Features of different asset types and extreme risk transmission during the COVID-19 crisis," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 10(1), pages 1-42, December.
    11. Costanza Torricelli & Beatrice Bertelli, 2022. "ESG screening strategies and portfolio performance: how do they fare in periods of financial distress?," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0087, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    12. Chen, Zhang-Hangjian & Kang, JingWen & Koedijk, Kees G. & Gao, Xiang & Gu, ZhenHua, 2024. "Short-term market reactions to ESG ratings disclosures: An event study in the Chinese stock market," Journal of Behavioral and Experimental Finance, Elsevier, vol. 43(C).
    13. Chen, Zhixiong & Sugiyama, Kohei & Tasaka, Kazuyuki & Kito, Tomomi & Yasuda, Yukihiro, 2024. "Impact of environmental, social and governance initiatives on firm value: Analysis using AI-based ESG scores for Japanese listed firms," Research in International Business and Finance, Elsevier, vol. 70(PA).
    14. Ali, Fahad & Bouri, Elie & Naifar, Nader & Shahzad, Syed Jawad Hussain & AlAhmad, Mohammad, 2022. "An examination of whether gold-backed Islamic cryptocurrencies are safe havens for international Islamic equity markets," Research in International Business and Finance, Elsevier, vol. 63(C).
    15. Wu, Zhenshu & Pownall, Rachel & Shih, Yi-Cheng & Wang, Yao, 2024. "Industry effects of corporate environmental and social scandals: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 95(PC).
    16. Dou, Winston Wei & Ji, Yan & Wu, Wei, 2021. "Competition, profitability, and discount rates," Journal of Financial Economics, Elsevier, vol. 140(2), pages 582-620.
    17. Ni, Yinan & Sun, Yanfei, 2023. "Environmental, social, and governance premium in Chinese stock markets," Global Finance Journal, Elsevier, vol. 55(C).
    18. Kliber, Agata, 2022. "Looking for a safe haven against American stocks during COVID-19 pandemic," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).
    19. Cheng, Louis T.W. & Cheong, Tsun Se & Wojewodzki, Michal & Chui, David, 2025. "The effect of ESG divergence on the financial performance of Hong Kong-listed firms: An artificial neural network approach," Research in International Business and Finance, Elsevier, vol. 73(PA).
    20. Chaudhry, Neeru & Dhawan, Priya, 2025. "CSR and exposure to systemic risk: Building resilience in non-financial firms," Pacific-Basin Finance Journal, Elsevier, vol. 93(C).

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    Statistics

    Access and download statistics

    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:reveco:v:88:y:2023:i:c:p:27-46. 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/inca/620165 .

    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.