ESG risk and market return predictability: new evidence from the Eurozone
ESG risk and market return predictability: new evidence from the Eurozone
This study examines the predictive power of incident-based Environmental, Social and Governance (ESG) risk on the Eurozone stock market returns using a forecast combination method. We find that our constructed indicator shows significant return predictability from both a statistical and economic perspective, with an out-of-sample CER gain of 4.55% and a Sharpe ratio of 0.43, consistently outperforming the mean benchmark. Moreover, we find that the predictive power is concentrated during non-expansion periods. We attribute this mechanism to the firm's fundamentals, cash flow and discount rate channels. Our findings highlight the value of ESG information for investors.
business cycle, forecast combination, incident-based ESG risk, return predictability
Li, Zhiyong
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Li, Zhuoran
0cd3a603-eecb-44e0-ba2b-ca2d2a1fc161
Qin, Weiping
3e8d75f0-72bb-4ac5-8301-51633cc0eb16
9 April 2025
Li, Zhiyong
b13d1328-f5b2-43f3-90e8-426f3bb95e0e
Li, Zhuoran
0cd3a603-eecb-44e0-ba2b-ca2d2a1fc161
Qin, Weiping
3e8d75f0-72bb-4ac5-8301-51633cc0eb16
Li, Zhiyong, Li, Zhuoran and Qin, Weiping
(2025)
ESG risk and market return predictability: new evidence from the Eurozone.
European Financial Management.
(doi:10.1111/eufm.12553).
Abstract
This study examines the predictive power of incident-based Environmental, Social and Governance (ESG) risk on the Eurozone stock market returns using a forecast combination method. We find that our constructed indicator shows significant return predictability from both a statistical and economic perspective, with an out-of-sample CER gain of 4.55% and a Sharpe ratio of 0.43, consistently outperforming the mean benchmark. Moreover, we find that the predictive power is concentrated during non-expansion periods. We attribute this mechanism to the firm's fundamentals, cash flow and discount rate channels. Our findings highlight the value of ESG information for investors.
Text
Euro Fin Management - 2025 - Li - ESG Risk and Market Return Predictability New Evidence From the Eurozone
- Version of Record
More information
Accepted/In Press date: 15 March 2025
e-pub ahead of print date: 9 April 2025
Published date: 9 April 2025
Keywords:
business cycle, forecast combination, incident-based ESG risk, return predictability
Identifiers
Local EPrints ID: 501935
URI: http://eprints.soton.ac.uk/id/eprint/501935
ISSN: 1354-7798
PURE UUID: 8c4d5a6e-7446-46fa-bf0e-d0d8c58263c4
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Date deposited: 12 Jun 2025 16:44
Last modified: 04 Sep 2025 02:36
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Contributors
Author:
Zhiyong Li
Author:
Zhuoran Li
Author:
Weiping Qin
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