Volatility and Herding Bias on ESG Leaders’ Portfolios Performance

Abstract

We here analyze the factor loadings given by the CAPM, the Fama–French three (FF3), and the five-factor model (FF5), and test the performance and the validity of adding two more factors (volatility and dispersion of returns) to the FF5 factor model of European index-based ESG leaders’ portfolios. Our ESG leaders’ portfolios generated significant negative alphas during 2012–2022, corroborating the literature’s negative argument. The negative abnormal returns of ESG leaders’ portfolios are homogeneous across the three ESG pillars. We conclude that European ESG leaders’ portfolios are biased toward large cap and value stocks with robust operating profitability and against aggressive investments. As robustness tests, we examine Global ESG leaders’ index-based portfolios, producing the same results but with reduced importance in some loading factors like profitability and investment strategy. Furthermore, we deduced that European and Global ESG leaders’ portfolios tilt towards volatility and herding bias.

Asset Pricing Models and the Performance of European Energy Indices

“…Chen and Gao (2020) employed a Fama and French three-factor model to examine how three defined volatility risk factors derived from VIX may affect the pricing of assets. In a recent paperGavrilakis and Floros (2024) by implying the CAPM, FF3, FF5 methodologies reported that European and Global indexes based ESG leaders' portfolios produce negative abnormal returns during 2012-2022, verifying the reports of previous studies and deduced that European ESG portfolios are tilt towards large cap, robust operating profitability and against aggressive investment.…”