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Do ESG ETFs provide downside risk protection during Covid-19? Evidence from forecast combination models

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  • Huang, Yujun

Abstract

This article examines the risk-related performance of ESG (Environmental, Social, and Governance) investments through the ETFs, with the employment of Oil & Gas ETFs as benchmark. We introduce the Value-at-Risk (VaR) and modified Sharpe Ratio (mSR) based on such measurement as representative of tail risk protection. The sample of this study is from March 2012 to January 2022, which covers the Covid-19 period, and we threat that period as a special shock. We provide unique forecast combination methods with a scoring function to predict the VaR of chosen ETFs, which helps to incorporate the economic value into the prediction. We test the out-of-sample performance of our forecast combination models and prove that they are more accurate than each of the underlying models. Our paper indicates that, during the pandemic crisis, ESG ETFs provide better Value-at-Risk but identical modified Sharpe Ratio compared to Oil & Gas ETFs. Additionally, we display that the pure ESG ETF investment does not generate either positive or negative excess returns in the long-run.

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  • Huang, Yujun, 2024. "Do ESG ETFs provide downside risk protection during Covid-19? Evidence from forecast combination models," International Review of Financial Analysis, Elsevier, vol. 94(C).
    • Handle: RePEc:eee:finana:v:94:y:2024:i:c:s1057521924002527
    DOI: 10.1016/j.irfa.2024.103320
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    More about this item

    Keywords

    ESG; ETFs; Value-at-risk; Forecast combination; COVID-19; Portfolio performance;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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