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Responsible investments reduce market risks

Giacomo Morelli () and Rita D’Ecclesia ()
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Giacomo Morelli: Sapienza University of Rome
Rita D’Ecclesia: Sapienza University of Rome

Decisions in Economics and Finance, 2021, vol. 44, issue 2, No 31, 1233 pages

Abstract: Abstract Responsible investments are considered one of the driving factors of revenues growth enhancing risk-adjusted returns. This paper investigates the effects of responsible investments on the volatility of European stock returns. First, we exploit an expectation–maximization (E–M) algorithm to cluster the companies into two groups according to the Environmental score (E), used as a proxy for responsible investments. Second, we build one global minimum variance (GMV) portfolio within each group and estimate its volatility using ARCH-type models. Finally, we forecast well-known risk measures such as the value-at-risk (VaR) and the expected tail loss (ETL) to assess market risks for investing green. Responsible portfolios composed of stocks with high E score outperform their Low E counterparts and are shown to be safer choices to mitigate risks, especially during periods of market distress. The results are remarkable for many sectors.

Keywords: Responsible investments; Environmental score; Portfolio optimization; Market risks; C38; C58; C61; Q50 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s10203-021-00351-w

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