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The effects on investor sentiment and business cycles on the systematic risk of an ESG portfolio

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  • Edgardo Cayon
  • Ravi Shukla

Abstract

In this study, we analyze the time varying nature of the systematic risk of an ESG portfolio to common sources of systematic risk. We model the conditional covariances and variances of different sources of systematic risk such as the world stock index, risk aversion as a proxy for investment sentiment (fear), and changes in interest rates. Afterwards, we test for sources of transmission of volatility to ESG systematic risk by controlling for different stages of the business cycle and rising interest rates. Our main finding is that investment sentiment (fear) is not a statistically significant source of systematic risk to the ESG portfolio in the expansion phases of the business cycle but becomes highly relevant in the trough and recession phases and during periods of rising interest rates.

Suggested Citation

  • Edgardo Cayon & Ravi Shukla, 2026. "The effects on investor sentiment and business cycles on the systematic risk of an ESG portfolio," PLOS ONE, Public Library of Science, vol. 21(11), pages 1-14, November.
    • Handle: RePEc:plo:pone00:0341348
    DOI: 10.1371/journal.pone.0341348
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