Responsible investments are considered one of the driving factors of revenues growth enhancing risk-adjusted returns. This paper investigates the effects of responsible investments on the volatility of European stock returns. First, we exploit an expectation–maximization (E–M) algorithm to cluster the companies into two groups according to the Environmental score (E), used as a proxy for responsible investments. Second, we build one global minimum variance (GMV) portfolio within each group and estimate its volatility using ARCH-type models. Finally, we forecast well-known risk measures such as the value-at-risk (VaR) and the expected tail loss (ETL) to assess market risks for investing green. Responsible portfolios composed of stocks with high E score outperform their Low E counterparts and are shown to be safer choices to mitigate risks, especially during periods of market distress. The results are remarkable for many sectors.

Responsible investments reduce market risks / Morelli, G.; D'Ecclesia, R.. - In: DECISIONS IN ECONOMICS AND FINANCE. - ISSN 1593-8883. - 44:2(2021), pp. 1211-1233. [10.1007/s10203-021-00351-w]

Responsible investments reduce market risks

Morelli G.
Primo
;
D'Ecclesia R.
2021

Abstract

Responsible investments are considered one of the driving factors of revenues growth enhancing risk-adjusted returns. This paper investigates the effects of responsible investments on the volatility of European stock returns. First, we exploit an expectation–maximization (E–M) algorithm to cluster the companies into two groups according to the Environmental score (E), used as a proxy for responsible investments. Second, we build one global minimum variance (GMV) portfolio within each group and estimate its volatility using ARCH-type models. Finally, we forecast well-known risk measures such as the value-at-risk (VaR) and the expected tail loss (ETL) to assess market risks for investing green. Responsible portfolios composed of stocks with high E score outperform their Low E counterparts and are shown to be safer choices to mitigate risks, especially during periods of market distress. The results are remarkable for many sectors.
2021
environmental score; market risks; portfolio optimization; responsible investments
01 Pubblicazione su rivista::01a Articolo in rivista
Responsible investments reduce market risks / Morelli, G.; D'Ecclesia, R.. - In: DECISIONS IN ECONOMICS AND FINANCE. - ISSN 1593-8883. - 44:2(2021), pp. 1211-1233. [10.1007/s10203-021-00351-w]
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11573/1625227
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