Hedging Covid-19 risk with ESG disclosure

Yuqian Jin, Qingfu Liu, Yiuman Tse and Kaixin Zheng

International Review of Economics & Finance, 2023, vol. 88, issue C, 27-46

Abstract: Covid-19 has led to major changes worldwide and has had a significant impact on market risk. We characterize this uncertainty as innovations extracted from the Covid Risk Index on the Wall Street Journal through a textual analysis of high-dimensional data. We hedge the risk with mimicking portfolios constructed using the ESG (environmental, social, and governance) disclosure score as a measure of firm-level exposure to Covid-19 risk. The hedge portfolios perform well both in and out of sample. We also test the role of ESG in hedging and discover that during the Covid-19 pandemic firms with greater ESG disclosure generate higher returns as well as experience lower downside risk. The further analysis suggests that the portfolio returns can be explained by Covid risk shock and investment inflow, and the hedge effect mainly comes from the social part of ESG.

Keywords: Covid-19 pandemic; ESG Disclosure; Hedge portfolios (search for similar items in EconPapers)
JEL-codes: G11 G14 G32 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:88:y:2023:i:c:p:27-46

DOI: 10.1016/j.iref.2023.06.002

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