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Robust enhanced indexation with ESG: An empirical study in the Chinese Stock Market

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  • Li, Xuepeng
  • Xu, Fengmin
  • Jing, Kui

Abstract

The enhanced indexation constructs tracking portfolios to outperform the benchmark index without incurring additional downside risk. Previous studies only consider optimizing the tracking portfolios return and risk measures derived from historical price data. As environmental, social and governance (ESG) topics advance in the capital markets, this paper quantifies the uncertainty behind ESG data and proposes a robust enhanced indexation model with real-life constraints. Using ESG ratings from three of China's mainstream raters over a period 2015–2020, we conduct empirical studies to compare portfolios constructed by our model and previous works. Numerical results demonstrate that embedding ESG in the enhanced indexation leads to higher returns and lower risks. Moreover, the superiorities of the robust tracking portfolio are reducing the share of assets with high ESG uncertainty and capturing the upward returns of ESG investment. Therefore, our tracking portfolio is suitable for conservative and green investors who are suspicious of ESG data.

Suggested Citation

  • Li, Xuepeng & Xu, Fengmin & Jing, Kui, 2022. "Robust enhanced indexation with ESG: An empirical study in the Chinese Stock Market," Economic Modelling, Elsevier, vol. 107(C).
    • Handle: RePEc:eee:ecmode:v:107:y:2022:i:c:s026499932100300x
    DOI: 10.1016/j.econmod.2021.105711
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    2. Kopyrina, Olga & Wu, Kai & Ying, Zhanyu, 2023. "Greening through central inspection: The role of legitimacy pressure and risk-taking," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    3. Hoang, Thi Hong Van & Pham, Linh & Nguyen, Thanh Thi Phuong, 2023. "Does country sustainability improve firm ESG reporting transparency? The moderating role of firm industry and CSR engagement," Economic Modelling, Elsevier, vol. 125(C).
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    5. Zou, Jin & Yan, Jingzhou & Deng, Guoying, 2023. "ESG rating confusion and bond spreads," Economic Modelling, Elsevier, vol. 129(C).
    6. Ling, Aifan & Li, Junxue & Wen, Limin & Zhang, Yi, 2023. "When trackers are aware of ESG: Do ESG ratings matter to tracking error portfolio performance?," Economic Modelling, Elsevier, vol. 125(C).
    7. Jiajia Liu & Zhenzhen Ge & Yahan Wang, 2024. "Role of environmental, social, and governance rating data in predicting financial risk and risk management," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(1), pages 260-273, January.
    8. Yikai Zhao & Jun Nagayasu & Xinyi Geng, 2024. "Measuring Climate Policy Uncertainty with LLMs: New Insights into Corporate Bond Credit Spreads," DSSR Discussion Papers 143, Graduate School of Economics and Management, Tohoku University.
    9. Kerkemeier, Marco & Kruse-Becher, Robinson, 2022. "Join the club! Dynamics of global ESG indices convergence," Finance Research Letters, Elsevier, vol. 49(C).

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