IDEAS home Printed from https://ideas.repec.org/a/gam/jjrfmx/v15y2022i2p80-d748895.html
   My bibliography  Save this article

Predictors of Excess Return in a Green Energy Equity Portfolio: Market Risk, Market Return, Value-at-Risk and or Expected Shortfall?

Author

Listed:
  • Rebecca Abraham

    (Huizenga College of Business, Nova Southeastern University, 3301 College Ave., Fort Lauderdale, FL 33314, USA)

  • Hani El-Chaarani

    (College of Business Administration, Beirut Arab University, P.O. Box 1150-20, Riad El Solh 11072809, Lebanon)

  • Zhi Tao

    (College of Business and Public Policy, University of Alaska-Anchorage, 3211 Providence Drive, Anchorage, AK 99508, USA)

Abstract

The rapid growth of electric vehicles, solar roofs, and wind power suggests that the potential growth in green equity investments is an emerging trend. Accordingly, this study measured the predictors of excess equity returns in a portfolio of global green energy producers, from 2010 to 2019. Fixed-effects panel data regressions of daily returns, followed by quantile regressions, were performed. There was some support for the explanation of green equity returns by market returns and market risk (beta), as indicated by the single-factor Capital Asset Pricing Model (CAPM), and the multifactor Fama–French Three-Factor and Fama–French Five-Factor Models. The most significant predictors of green equity returns were Value-at-Risk at a 95% confidence level, and Value-at-Risk at a 99% confidence level. Expected Shortfall was another extreme risk value measure. The importance of extreme value measures suggests the presence of fat-tailed leptokurtic distributions, whereby excess returns were explained by the risk of loss given adverse conditions, primarily at 95% confidence. We conclude that the proliferation of small firms and new entrants in the renewable energy sector has led to the explanation of returns by extreme values of risk.

Suggested Citation

  • Rebecca Abraham & Hani El-Chaarani & Zhi Tao, 2022. "Predictors of Excess Return in a Green Energy Equity Portfolio: Market Risk, Market Return, Value-at-Risk and or Expected Shortfall?," JRFM, MDPI, vol. 15(2), pages 1-31, February.
    • Handle: RePEc:gam:jjrfmx:v:15:y:2022:i:2:p:80-:d:748895
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/1911-8074/15/2/80/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/1911-8074/15/2/80/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Karl B. Diether & Christopher J. Malloy & Anna Scherbina, 2002. "Differences of Opinion and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, vol. 57(5), pages 2113-2141, October.
    2. Kathrin Lesser & Sebastian Lobe & Christian Walkshäusl, 2014. "Green and socially responsible investing in international markets," Journal of Asset Management, Palgrave Macmillan, vol. 15(5), pages 317-331, October.
    3. J. Tobin, 1958. "Liquidity Preference as Behavior Towards Risk," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 25(2), pages 65-86.
    4. Clarkson, Peter M. & Li, Yue & Richardson, Gordon D. & Vasvari, Florin P., 2011. "Does it really pay to be green? Determinants and consequences of proactive environmental strategies," Journal of Accounting and Public Policy, Elsevier, vol. 30(2), pages 122-144, March.
    5. repec:bla:jfinan:v:59:y:2004:i:1:p:31-63 is not listed on IDEAS
    6. Miller, Edward M, 1977. "Risk, Uncertainty, and Divergence of Opinion," Journal of Finance, American Finance Association, vol. 32(4), pages 1151-1168, September.
    7. Haim Shalit & Shlomo Yitzhaki, 2003. "An Asset Allocation Puzzle: Comment," American Economic Review, American Economic Association, vol. 93(3), pages 1002-1008, June.
    8. Rania Jammazi & Duc Khuong Nguyen, 2017. "Estimating and forecasting portfolio’s Value-at-Risk with wavelet-based extreme value theory: Evidence from crude oil prices and US exchange rates," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 68(11), pages 1352-1362, November.
    9. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    10. Fama, Eugene F & French, Kenneth R, 1996. "Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
    11. Saltari, Enrico & Travaglini, Giuseppe, 2011. "The effects of environmental policies on the abatement investment decisions of a green firm," Resource and Energy Economics, Elsevier, vol. 33(3), pages 666-685, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Syuhada, Khreshna & Hakim, Arief, 2024. "Risk quantification and validation for green energy markets: New insight from a credibility theory approach," Finance Research Letters, Elsevier, vol. 62(PA).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Amit Goyal, 2012. "Empirical cross-sectional asset pricing: a survey," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 26(1), pages 3-38, March.
    2. Avanidhar Subrahmanyam, 2010. "The Cross†Section of Expected Stock Returns: What Have We Learnt from the Past Twenty†Five Years of Research?," European Financial Management, European Financial Management Association, vol. 16(1), pages 27-42, January.
    3. Aboulamer, Anas & Kryzanowski, Lawrence, 2016. "Are idiosyncratic volatility and MAX priced in the Canadian market?," Journal of Empirical Finance, Elsevier, vol. 37(C), pages 20-36.
    4. Phillip J. McKnight & Steven K. Todd, 2006. "Analyst Forecasts and the Cross Section of European Stock Returns," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 15(5), pages 201-224, December.
    5. Jank, Stephan & Roling, Christoph & Smajlbegovic, Esad, 2021. "Flying under the radar: The effects of short-sale disclosure rules on investor behavior and stock prices," Journal of Financial Economics, Elsevier, vol. 139(1), pages 209-233.
    6. Wang, Huijun & Yan, Jinghua & Yu, Jianfeng, 2017. "Reference-dependent preferences and the risk–return trade-off," Journal of Financial Economics, Elsevier, vol. 123(2), pages 395-414.
    7. Frank Weikai Li, 2016. "Macro Disagreement and the Cross-Section of Stock Returns," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 6(1), pages 1-45.
    8. Guo, Hui & Qiu, Buhui, 2014. "Options-implied variance and future stock returns," Journal of Banking & Finance, Elsevier, vol. 44(C), pages 93-113.
    9. Li, Xingjian & Feng, Hongrui & Yan, Shu & Wang, Heng, 2021. "Dispersion in analysts’ target prices and stock returns," The North American Journal of Economics and Finance, Elsevier, vol. 56(C).
    10. Rocciolo, Francesco & Gheno, Andrea & Brooks, Chris, 2022. "Explaining abnormal returns in stock markets: An alpha-neutral version of the CAPM," International Review of Financial Analysis, Elsevier, vol. 82(C).
    11. Gharghori, Philip & See, Quin & Veeraraghavan, Madhu, 2011. "Difference of opinion and the cross-section of equity returns: Australian evidence," Pacific-Basin Finance Journal, Elsevier, vol. 19(4), pages 435-446, September.
    12. Leszek Czapiewski & Joanna Lizińska, 2019. "Explanatory Power of Pre-Issue Financial Strength for Long-Term Market Performance: Evidence from Initial Equity Offerings on an Emerging Market," IJFS, MDPI, vol. 7(1), pages 1-16, March.
    13. Jang, Jeewon & Kang, Jangkoo, 2019. "Probability of price crashes, rational speculative bubbles, and the cross-section of stock returns," Journal of Financial Economics, Elsevier, vol. 132(1), pages 222-247.
    14. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Journal of Finance, American Finance Association, vol. 55(4), pages 1515-1567, August.
    15. Sonntag, Dominik, 2018. "Die Theorie der fairen geometrischen Rendite [The Theory of Fair Geometric Returns]," MPRA Paper 87082, University Library of Munich, Germany.
    16. Xue-Zhong He & Lei Shi, 2009. "Portfolio Analysis and Zero-Beta CAPM with Heterogeneous Beliefs," Research Paper Series 244, Quantitative Finance Research Centre, University of Technology, Sydney.
    17. Xue-Zhong He & Lei Shi, 2008. "Heterogeneity, Bounded Rationality and Market Dysfunctionality," Research Paper Series 233, Quantitative Finance Research Centre, University of Technology, Sydney.
    18. Söhnke M. Bartram & Harald Lohre & Peter F. Pope & Ananthalakshmi Ranganathan, 2021. "Navigating the factor zoo around the world: an institutional investor perspective," Journal of Business Economics, Springer, vol. 91(5), pages 655-703, July.
    19. Bernd Kempa & Michael Nelles, 2001. "International correlations and excess returns in European stock markets: does EMU matter?," Applied Financial Economics, Taylor & Francis Journals, vol. 11(1), pages 69-73.
    20. Luo, Di & Farag, Hisham, 2024. "ESG and aggregate disagreement," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 92(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jjrfmx:v:15:y:2022:i:2:p:80-:d:748895. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.