Article publication Do ESG ETFs provide downside risk protection during Covid-19? Evidence from forecast combination models by Yujun Huang in International Review of Financial Analysis.
Volume 94, July 2024, 103320, https://doi.org/10.1016/j.irfa.2024.103320
This article examines the risk-related performance of ESG (Environmental, Social, and Governance) investments through the ETFs, with the employment of Oil & Gas ETFs as benchmark. We introduce the Value-at-Risk (VaR) and modified Sharpe Ratio (mSR) based on such measurement as representative of tail risk protection. The sample of this study is from March 2012 to January 2022, which covers the Covid-19 period, and we threat that period as a special shock. We provide unique forecast combination methods with a scoring function to predict the VaR of chosen ETFs, which helps to incorporate the economic value into the prediction. We test the out-of-sample performance of our forecast combination models and prove that they are more accurate than each of the underlying models. Our paper indicates that, during the pandemic crisis, ESG ETFs provide better Value-at-Risk but identical modified Sharpe Ratio compared to Oil & Gas ETFs. Additionally, we display that the pure ESG ETF investment does not generate either positive or negative excess returns in the long-run.