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ESG tail risk: The Covid-19 market crash analysis

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  • Lashkaripour, Mohammadhossein

Abstract

This paper shows that strong ESG taste leads to higher tail risk in high-ESG (green) stocks compared to low-ESG (brown) stocks during market crashes. In crash episodes, strong ESG tastes induce investors to hold green stocks despite negative expected returns. Logically, the non-pecuniary benefit from ESG investing compensates for the dis-utility of financial loss. This expectation of price declines makes put options on green stocks more expensive and increases tail risk. I conduct a pseudo-causal analysis on the COVID-19 market crash that supports these theoretical findings. My findings provide novel implications for portfolio selection and risk management with ESG consideration.

Suggested Citation

  • Lashkaripour, Mohammadhossein, 2023. "ESG tail risk: The Covid-19 market crash analysis," Finance Research Letters, Elsevier, vol. 53(C).
    • Handle: RePEc:eee:finlet:v:53:y:2023:i:c:s1544612322007747
    DOI: 10.1016/j.frl.2022.103598
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    Cited by:

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    3. Meyer, Julia, 2024. "Willingness to take risks for sustainability during the COVID-19 pandemic," Finance Research Letters, Elsevier, vol. 59(C).
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    5. Staněk Gyönyör, Lucie & Horváth, Matúš, 2024. "Does ESG affect stock market dependence? An empirical exploration of S&P 1200 companies shows the divergent nature of E–S–G pillars," Research in International Business and Finance, Elsevier, vol. 69(C).
    6. Ben Ameur, Hachmi & Ftiti, Zied & Louhichi, Waël & Yousfi, Mohamed, 2024. "Do green investments improve portfolio diversification? Evidence from mean conditional value-at-risk optimization," International Review of Financial Analysis, Elsevier, vol. 94(C).

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