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The term diversification then comes into play. Broadly speaking, diversification enables investors to reduce their overall risk exposure by combining financial assets that have a weakly positive correlation on average so that potential losses in one asset can be at least partially offset by gains in other asset classes Grauer and Shen, , Joost and Laeven, In the case of an asset that is uncorrelated or negatively correlated with another asset or portfolio in periods of economic downturns or crisis, it becomes a so-called safe haven Baur and McDermott, , Baur and Lucey, Diverse studies reveal that crude oil is not making as much of a dent in risk mitigation as originally expected Conlon and McGee, , Corbet et al.
Thus, relevant and updated studies in the field of financial allocation, such as Ji et al. Moreover, most of the existing studies restrict their analysis at the identification of the potential role of ESG securities as diversifiers or hedges without quantifying the diversification and hedging benefits of ESG investments against conventional investments through risk management analysis and portfolio performance assessment.
Thus, the present paper extends the previous literature by raising two research questions. Second, beyond contributing to risk reduction, does the performance of conventional assets and potential safe haven assets improve when they are combined with ESG securities?
However, since the use of exchange-traded-funds ETFs offers several advantages, to address our research questions we rely on daily data for six ETFs linked to different assets over the period — Second, gold, oil and cryptocurrencies are employed to track the performance of traditionally considered safe havens or, at least, hedges.
Third, from the wide ESG investment spectrum, the target investor in this research is one with investment preferences towards the equity market and involved with environmental concerns. Thus, we focus on green equities. This score considers the categories of sustainable impact solutions, carbon intensity, and green revenues. To achieve the goal of this study, our methodological approach consists of examining the dynamic correlation behavior of optimal portfolios of considered alternative assets when ESG assets are incorporated.
Using novel and particularly suitable techniques, we examine the significant ability of SRI to diversify and improve the performance of different portfolios in which clean energy equities are combined with either conventional equities, conventional Treasury bonds, gold, crude oil, or Bitcoin. The left tail of the return distribution is the focus of these techniques, which are essential for inferring diversification and safe haven implications.
In concrete terms, we apply different frequency portfolio rebalancing based on the minimum variance optimization method, allowing us to evaluate the ESG results both in terms of risk and return during the pandemic period. In order to model the conditional co-moments between each pair of asset returns, a DCC skew Student copula is used to fit the time-varying covariance matrix. Unlike other correlation approaches, this Student copula gives an overall view and characterization of the joint distribution.
A sufficiently consistent period to make GARCH and copula estimates is analyzed, including a first part of relative calm in the markets corresponding to , and a second subperiod characterized by the pandemic spanning from to Initial results for the time-varying volatilities and Dependences among security pairs indicate high volatility for individual assets and strong evidence of interdependence among assets during the early stages of the pandemic.
However, in subsequent shocks of the crisis, the correlation between clean energy equities and considered assets is much lower. This provides diversifying evidence in favor of SRI. As a result of the portfolio rebalancing exercise, we observe that overall, the active management of ESG portfolios yields higher performance than the passive investment in single securities.
In other words, SRI provide a hedge for most of the single asset classes and improves the risk-return relationship of individual investments. In light of these findings, it appears that SRI have the potential to reduce risk, as well as increase portfolio performance during times of crisis, such as the recent pandemic caused by the SARS-CoV-2 virus. The present work makes several contributions to the existing literature. Unlike the previous literature, we assess the performance of single investments in conventional equities and Treasury bonds and in commonly considered safe haven assets i.
Thus, our approach allows one to compare the performance of the active management of each ESG portfolio against 1 the passive strategy of investing in the corresponding asset and holding this position 2 the active management of a set of competing ESG portfolios that involve very diverse asset classes from the equity, Treasury, commodity and cryptocurrency markets.
Second, studies on the performance of ESG assets mostly rely on the widely employed Sharpe ratio Alexopoulos, , Omura et al. The advantage of the downside risk performance measures over the Sharpe ratio is that the returns are not adjusted by the standard deviation, which considers both negative and positive deviations from the mean return, but by the negative deviations of returns from a minimal acceptable return or threshold.
Third, most of the literature examines whether ESG assets exhibit diversifying or hedging features based on the analysis of their dependence or correlation with other asset classes through different methodological approaches Elie et al. Thus, these studies merely report on the potential ability of ESG assets to act as a diversifier or a hedge when there exists evidence of low positive correlation or no significant correlation with other assets.
However, results in the present study, which goes beyond correlation analysis, reveal that ESG-diversified portfolios outperform passive investments in individual assets, thus indicating the benefits of hedges with ESG assets despite reported evidence of strong interdependence with the rest of considered assets in the early stages of the sanitary crisis. Fourth, our results contribute to better understanding the reasons why investors would keep supporting sustainable financing through the demand of green financial instruments in the presence of an external shock, such as the COVID sanitary crisis, which is essential for the implementation of policy actions that promote the role of sustainable financing in the transition to a greener economy.
The remainder of this paper proceeds as follows. Section 2 provides a brief review of the relevant literature. Section 3 introduces the conditional univariate and multivariate methodology to be implemented in the calibration of the minimum variance portfolios. Section 4 describes the dataset employed. All rights reserved. Elsevier hereby grants permission to make all its COVIDrelated research that is available on the COVID resource centre - including this research content - immediately available in PubMed Central and other publicly funded repositories, such as the WHO COVID database with rights for unrestricted research re-use and analyses in any form or by any means with acknowledgement of the original source.
This article has been cited by other articles in PMC. Associated Data mmc1. The analysis authenticated that the health crisis that befell due to COVID have imperatively originated the financial crisis globally; however, the Asian markets still make available better prospects for portfolio optimization.
Introduction In the past, World health organization WHO revealed various epidemics that influenced the vast number of people and economies around the world, e.
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