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

Rebecca Abraham, Hani El-Chaarani and Zhi Tao
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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

JRFM, 2022, vol. 15, issue 2, 1-31

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.

Keywords: green equities; Capital Asset Pricing Model; Fama–French Three-Factor Model; Fama–French Five-Factor Model; Value-at-Risk; Expected Shortfall (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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