Exploring the hedge, diversifier and safe haven properties of ESG investments: A cross-quantilogram analysis

Pedini, Luca and Severini, Sabrina (2022): Exploring the hedge, diversifier and safe haven properties of ESG investments: A cross-quantilogram analysis.

Abstract

This article proposes an empirical investigation, based on a cross-quantilogram analysis, to assess the hedge, diversifier and safe haven properties of Environmental, Social and Governance (ESG) assets in comparison to conventional investment practices (equity index, gold, commodities and cryptocurrencies). Our evidence shows that ESG assets have a weak safe haven properties but still represent an outstanding diversification and hedge asset, depending on the asset class taken as reference. Our results provide important implications for risk management suggesting that investors have started considering sustainable investing as a new measure of value maximization and risk reduction.

• Item Type: MPRA Paper
• Language: English
• Keywords: cross-quantilogram; ESG investment; safe haven; portfolio allocation
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C52 - Model Evaluation, Validation, and Selection; G - Financial Economics > G0 - General > G01 - Financial Crises; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions

References

Albuquerque, R., Koskinen, Y., and Zhang, C. (2019), Corporate social responsibility and firm risk: Theory and empirical evidence, Management Science 65 (10): 4451–4469.

Albuquerque, R., Koskinen, Y., Yang, S., and Zhang, C. (2020). Resiliency of Environmental and Social Stocks: An Analysis of the Exogenous COVID-19 Market Crash. The Review of Corporate Finance Studies, 9(3), 593–621. https://doi.org/10.1093/rcfs/cfaa011

Bachelet, M. J., Becchetti, L., and Manfredonia, S. (2019). The green bonds premium puzzle: The role of issuer characteristics and third-party verification. Sustainability, 11(4), 1098

Baumöhl, E., and Lyócsa, Š. (2017). Directional predictability from stock market sector indices to gold: A cross-quantilogram analysis. Finance Research Letters, 23, 152–164. https://doi.org/10.1016/j.frl.2017.02.013

Baur, D. G., and Lucey, B. M. (2010). Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds and Gold. Financial Review, 45(2), 217–229. https://doi.org/10.1111/j.1540-6288.2010.00244.x

Baur, D. G., and McDermott, T. K. (2010). Is gold a safe haven? International evidence. Journal of Banking & Finance, 34(8), 1886-1898

Baur, D. G., Hong, K., and Lee, A. D. (2018). Bitcoin: Medium of exchange or speculative assets?. Journal of International Financial Markets, Institutions and Money, 54, 177-189

Beckmann, J., Berger, T., and Czudaj, R. (2015). Does gold act as a hedge or a safe haven for stocks? A smooth transition approach. Economic Modelling, 48, 16-24.

Bekiros, S., Boubaker, S., Nguyen, D. K., and Uddin, G. S. (2017). Black swan events and safe havens: The role of gold in globally integrated emerging markets. Journal of International Money and Finance, 73, 317-334

Bouri, E., Gupta, R., Tiwari, A. K., and Roubaud, D. (2017). Does Bitcoin hedge global uncertainty? Evidence from wavelet-based quantile-in-quantile regressions. Finance Research Letters, 23, 87-95

Broadstock, D. C., Chan, K., Cheng, L. T. W., and Wang, X. (2021). The role of ESG performance during times of financial crisis: Evidence from COVID-19 in China. Finance Research Letters, 38, 101716. https://doi.org/10.1016/j.frl.2020.101716

Cheema, M. A., Faff, R. W., and Szulczuk, K. (2020). The 2008 global financial crisis and COVID-19 pandemic: How safe are the safe haven assets?. Available at SSRN 3590015.

Corbet, S., Hou, Y. (Greg), Hu, Y., Larkin, C., and Oxley, L. (2020). Any port in a storm: Cryptocurrency safe havens during the COVID-19 pandemic. Economics Letters, 194, 109377. https://doi.org/10.1016/j.econlet.2020.109377

Díaz, V., Ibrushi, D., and Zhao, J. (2021). Reconsidering systematic factors during the COVID-19 pandemic–The rising importance of ESG. Finance Research Letters, 38, 101870. https://doi.org/10.1016/j.frl.2020.101870

Dickey, David A., and Wayne A. Fuller (1979). "Distribution of the estimators for autoregressive time series with a unit root." Journal of the American Statistical Association, 74, 366: 427-431.

Disli, M., Nagayev, R., Salim, K., Rizkiah, S. K., and Aysan, A. F. (2021). In search of safe haven assets during COVID-19 pandemic: An empirical analysis of different investor types. Research in International Business and Finance, 58, 101461.

Doornik, J. A., and Hansen, H. (2008). An omnibus test for univariate and multivariate normality. Oxford Bulletin of Economics and Statistics, 70, 927-939.

Engle, Robert F (1982). "Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation." Econometrica: Journal of the Econometric Society: 987-1007.

Falck, O., and Heblich, S. (2007). Corporate social responsibility: Doing well by doing good. Business Horizons, 50(3), 247-254. https://doi.org/10.1016/j.bushor.2006.12.002

Ferriani, F., and Natoli, F. (2020). ESG risks in times of COVID-19. Applied Economics Letters, 0(0), 1–5. https://doi.org/10.1080/13504851.2020.1830932

Flammer, C. (2015), Does product market competition foster corporate social responsibility? Evidence from trade liberalization, Strategic Management Journal 36 (10): 1469– 1485

Folger-Laronde, Z., Pashang, S., Feor, L., ElAlfy, A., (2020). ESG ratings and financial performance of exchange–traded funds during the Covid-19 pandemic. Journal of Sustainable Finance & Investment 1–7. https://doi.org/10.1080/20430795.2020.1782814

Grisse, C., and Nitschka, T. (2015). On financial risk and the safe haven characteristics of Swiss franc exchange rates. Journal of Empirical Finance, 32, 153-164.

Han, H., Linton, O., Oka, T., and Whang, Y. J. (2016). The cross-quantilogram: Measuring quantile dependence and testing directional predictability between time series. Journal of Econometrics, 193(1), 251-270.

Hachenberg, B., and Schiereck, D. (2018). Are green bonds priced differently from conventional bonds?. Journal of Asset Management, 19(6), 371-383.

Heinkel, R., Kraus, A., and Zechner, J., 2001. The effect of green investment on corporate behavior. Journal of Financial and Quantitative Aanalysis, 36.4 (2001): 431-449

Hong, H., and Kacperczyk, M. (2009). The price of sin: The effects of social norms on markets. Journal of Financial Economics, 93(1), 15-36 https://doi.org/10.1016/j.jfineco.2008.09.001

Ji, Q., Zhang, D., and Zhao, Y. (2020). Searching for safe haven assets during the COVID-19 pandemic. International Review of Financial Analysis, 71, 101526. https://doi.org/10.1016/j.irfa.2020.101526

Klein, T. (2017). Dynamic correlation of precious metals and flight-to-quality in developed markets. Finance Research Letters, 23, 283-290.

Kwiatkowski, D., Phillips, P. C., Schmidt, P., and Shin, Y. (1992). Testing the null hypothesis of stationarity against the alternative of a unit root: How sure are we that economic time series have a unit root? Journal of Econometrics, 54(1-3), 159-178.

Lins, K. V., Servaes, H., and Tamayo, A. (2017). Social capital, trust, and firm performance: The value of corporate social responsibility during the financial crisis. The Journal of Finance, 72(4), 1785-1824. https://doi.org/10.1111/jofi.12505

Lucey, B. M., and Li, S. (2015). What precious metals act as safe havens, and when? Some US evidence. Applied Economics Letters, 22(1), 35-45.

Mariana, C. D., Ekaputra, I. A., and Husodo, Z. A. (2021). Are Bitcoin and Ethereum safe havens for stocks during the COVID-19 pandemic? Finance Research Letters, 38, 101798. https://doi.org/10.1016/j.frl.2020.101798

Nofsinger, J., and Varma, A. (2014). Socially responsible funds and market crises. Journal of Banking & Finance, 48, 180-193. https://doi.org/10.1016/j.jbankfin.2013.12.016

Omura, A., Roca, E., and Nakai, M. (2020). Does Responsible Investing Pay during Economic Downturns: Evidence from the COVID-19 Pandemic. Finance Research Letters, 101914. https://doi.org/10.1016/j.frl.2020.101914

Pham, L., 2016. Is it risky to go green? A volatility analysis of the green bond market. Journal of Sustainable Finance & Investment. 6 (4), 263–291.

Phillips, Peter CB, and Pierre Perron (1988). "Testing for a unit root in time series regression." Biometrika, 75, 2: 335-346.

Politis, D. N., and Romano, J. P. (1994). The stationary bootstrap. Journal of the American Statistical Association, 89(428), 1303-1313.

Pollard, J.L., Sherwood, M.W., and Klobus, R.G. (2018). Establishing ESG as risk premia. Journal of Investment Management 16 (1), 32–43.

Ratner, M., and C. Chiu. (2013). “Hedging Stock Sector Risk with Credit Default Swaps.” International Reviews Finance Analysis 30: 18–25. doi:10.1016/j.irfa.2013.05.001.

Reboredo, J.C., (2018). Green bond and financial markets: co-movement, diversification and price spillover effects. Energy Economics. 74, 38–50.

Renneboog, L., ter Horst, J., and Zhang, C., (2011). Is ethical money financially smart? Nonfinancial attributes and money flows of socially responsible investment funds. Journal of Financial Intermediation 20, 562-588.

Salisu, A. A., Vo, X. V., and Lawal, A. (2021). Hedging oil price risk with gold during COVID-19 pandemic. Resources Policy, 70, 101897.

Shahzad, S. J. H., Bouri, E., Roubaud, D., Kristoufek, L., & Lucey, B. (2019). Is Bitcoin a better safe haven investment than gold and commodities? International Review of Financial Analysis, 63, 322–330. https://doi.org/10.1016/j.irfa.2019.01.002

Silva, F., and Cortez, M. C. (2016). The performance of US and European green funds in different market conditions. Journal of Cleaner Production, 135, 558-566.

Singh, A. (2020). COVID-19 and safer investment bets. Finance Research Letters, 36, 101729. https://doi.org/10.1016/j.frl.2020.101729

Stensås, A., Nygaard, M. F., Kyaw, K., & Treepongkaruna, S. (2019). Can Bitcoin be a diversifier, hedge or safe haven tool?. Cogent Economics & Finance, 7(1), 1593072.

Uddin, G. S., Rahman, M. L., Hedström, A., and Ahmed, A. (2019). Cross-quantilogram-based correlation and dependence between renewable energy stock and other asset classes. Energy Economics, 80, 743-759.

Umar, Z., Gubareva, M., and Teplova, T. (2021). The impact of Covid-19 on commodity markets volatility: Analyzing time-frequency relations between commodity prices and coronavirus panic levels. Resources Policy, 73, 102164.

Verheyden, T., Eccles, R. G., & Feiner, A. (2016). ESG for all? The impact of ESG screening on return, risk, and diversification. Journal of Applied Corporate Finance, 28(2), 47-55. https://doi.org/10.1111/jacf.12174