Time series momentum trading in green stocks

Abstract

Purpose The purpose of this study is to explore the inherent instability, if any, in the context of investment in stocks of environment friendly companies (or the “green” stocks) across the globe using the time series momentum (TSM) trading strategies. Design/methodology/approach Using the monthly data for the Green Indexes from the USA, the Europe and the Asia-Pacific region over 2003-2019, the authors construct TSM trading strategies to examine the efficacy of regional Green Indexes as well as two diversified global green portfolios to offer abnormal return to attract investors, particularly speculators. The authors’ explore further whether such strategies could operate as hedging instrument. A comparison of results across different regions helps the authors establish a universal nature, if any, of investment in green stocks. Findings The study finds that regional Green Indexes are unable to outperform the market. The global green portfolios perform significantly better. The inefficacy of the relevant time series momentum trading strategies rules out the possibility of speculations. However, the number of profitable momentum strategies is significantly higher for the diversified portfolios in longer run. The portfolios perform significantly better in outperforming the buy-only strategies as well. The stable market, escalated demand and the resulting increment in valuation of green stocks make adoption of greener technologies a choice rather than a forced obligation. This offers a solution to the problem of Tragedy of Common. Originality/value Sustained increase in investment in green stocks is crucial from an environment perspective, as better valuation of their stocks would indubitably convince firms to reduce their carbon footprints. A continued enthusiasm however would require investors’ faith in it. Presence of momentum profit would invite speculators leading to irrational exuberance, dwindling confidence and consequent fragility. Literature on green investment is relatively sparse with the threat of its vulnerability issues left largely unnoticed. The authors’ study fills these gaps.

Efficiency Evaluation and Selection Strategies for Green Portfolios under Different Risk Appetites

“…On the other hand, the focus is on green performance in corporate management, which is based on a composite indicator score such as corporate social responsibility. For example, Chakrabarti and Sen [31] used the Dow-Jones Global-Total-Stock-Market Index to set stocks of environmentally friendly companies as green stocks and tested the effectiveness of a green portfolio consisting of a regional green index. Allevi et al [32] argued that the green investing is a subset of socially responsible investment (SRI), thus determining green funds in their study with the help of a series of indicators of corporate social responsibility.…”

A Review of Momentum Strategy in Capital Market

“…Research in America using the Green Index data by [8] reveals that in the long term, the momentum strategy on the Green Index on the American Stock Exchange is still better, yet also states that momentum strategy is less effective. In another American study, [9] say that there is an indication of a consistent stock portfolio group.…”

Do stock markets value green operations? Evidence from India

“…Various studies have used different proxies to measure the greenness of firms. For example, Chakrabarti and Sen (2020) use green indices, Boulatoff and Boyer (2009) define green companies as firms that have adopted non-traditional and renewable energy sources like biofuels, fuel cells and solar energy. Levi and Newton (2016) use Newsweek's Green Rankings to classify firms into green and non-green groups, while Ardia et al (2020) use carbon emissions per million sales.…”

“…This wide range of proxies may not always measure the greenness of the firms uniformly. For example, Chakrabarti and Sen's (2020) green indices also consider market capitalization and corporate governance along with greenness. Even Boulatoff and Boyer's (2009) basis for classification of firms has a limitation, in that firms that are greener in the traditional manufacturing sectors are classified into non-green firms.…”