Do ESG Ratings Reduce the Asymmetry Behavior in Volatility?

Hashem Zarafat, Sascha Liebhardt and Mustafa Hakan Eratalay
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Hashem Zarafat: School of Business, Wittenborg University of Applied Sciences, Munich Campus, Wolfratshauser Str. 84, 81379 Munich, Germany
Sascha Liebhardt: School of Business, Wittenborg University of Applied Sciences, Munich Campus, Wolfratshauser Str. 84, 81379 Munich, Germany
Mustafa Hakan Eratalay: Department of Economics, University of Tartu, Narva Mnt 18, 51009 Tartu, Estonia

JRFM, 2022, vol. 15, issue 8, 1-32

Abstract: It is well noted in the literature that volatility responds differently to positive and negative shocks. In this paper, we explore the impact of ESG ratings on such asymmetric behavior of volatility. For this analysis, we use the return data, ESG ratings, and solvency ratios of the constituent stocks of S&P Europe 350 for the period January 2016–December 2021. We apply autoregressive moving average models for the conditional means and GARCH and stochastic volatility models for the conditional variances to estimate the asymmetry coefficients. Afterwards, these coefficients are regressed via Arellano–Bond and lagged first difference methods to estimate the impact of ESG ratings. Our findings confirm that stocks of riskier firms are more likely to suffer from asymmetry behavior of volatility. We also confirm that firm leverage is linked to this asymmetry behavior. We found evidence that the impact of ESG ratings was negative before COVID-19, but positive afterwards. For some sectors, higher ESG ratings are linked to higher asymmetry. Finally, we found that during COVID-19, the asymmetry behavior became more pronounced.

Keywords: asymmetric effects; leverage effects; GARCH; stochastic volatility; ARMA; ESG; CSR; COVID-19; estimated dependent variable (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 (2)

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