Vine copula based dependence modeling in sustainable finance
Climate change and sustainability have become societal focal points in the last decade. Consequently, companies have been increasingly characterized by non-financial information, such as environmental, social, and governance (ESG) scores, based on which companies can be grouped into ESG classes. Whi...
| Main Authors: | , , , , , |
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| Format: | Article |
| Language: | English |
| Published: |
KeAi Communications Co., Ltd.
2022-11-01
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| Series: | Journal of Finance and Data Science |
| Subjects: | |
| Online Access: | http://www.sciencedirect.com/science/article/pii/S2405918822000162 |
| _version_ | 1827267332887543808 |
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| author | Claudia Czado Karoline Bax Özge Sahin Thomas Nagler Aleksey Min Sandra Paterlini |
| author_facet | Claudia Czado Karoline Bax Özge Sahin Thomas Nagler Aleksey Min Sandra Paterlini |
| author_sort | Claudia Czado |
| collection | DOAJ |
| description | Climate change and sustainability have become societal focal points in the last decade. Consequently, companies have been increasingly characterized by non-financial information, such as environmental, social, and governance (ESG) scores, based on which companies can be grouped into ESG classes. While many scholars have questioned the relationship between financial performance and risks of assets belonging to different ESG classes, the question about dependence among ESG classes is still open. Here, we focus on understanding the dependence structures of different ESG class indices and the market index through the lens of copula models. After a thorough introduction to vine copula models, we explain how cross-sectional and temporal dependencies can be captured by models based on vine copulas, more specifically, using ARMA-GARCH and stationary vine copula models. Using real-world ESG data over a long period with different economic states, we find that assets with medium ESG scores tend to show weaker dependence to the market, while assets with extremely high or low ESG scores tend to show stronger, non-Gaussian dependence. |
| first_indexed | 2024-04-10T09:31:45Z |
| format | Article |
| id | doaj.art-335548ff80a04967afd7d751d107357e |
| institution | Directory Open Access Journal |
| issn | 2405-9188 |
| language | English |
| last_indexed | 2025-03-22T04:32:04Z |
| publishDate | 2022-11-01 |
| publisher | KeAi Communications Co., Ltd. |
| record_format | Article |
| series | Journal of Finance and Data Science |
| spelling | doaj.art-335548ff80a04967afd7d751d107357e2024-04-28T02:43:04ZengKeAi Communications Co., Ltd.Journal of Finance and Data Science2405-91882022-11-018309330Vine copula based dependence modeling in sustainable financeClaudia Czado0Karoline Bax1Özge Sahin2Thomas Nagler3Aleksey Min4Sandra Paterlini5Department of Mathematics, Technical University of Munich, Munich, Germany; Munich Data Science Institute, Garching, Germany; Corresponding author. Department of Mathematics, Technical University of Munich, Munich, GermanyDepartment of Economics and Management, University of Trento, Trento, Italy; TUM School of Management, TUM Campus Heilbronn, Technical University of Munich, Heilbronn, GermanyDepartment of Mathematics, Technical University of Munich, Munich, Germany; Munich Data Science Institute, Garching, GermanyDepartment of Statistics, Ludwig Maximilian University of Munich, Munich, Germany; Munich Center for Machine Learning, Munich, GermanyDepartment of Mathematics, Technical University of Munich, Munich, GermanyDepartment of Economics and Management, University of Trento, Trento, ItalyClimate change and sustainability have become societal focal points in the last decade. Consequently, companies have been increasingly characterized by non-financial information, such as environmental, social, and governance (ESG) scores, based on which companies can be grouped into ESG classes. While many scholars have questioned the relationship between financial performance and risks of assets belonging to different ESG classes, the question about dependence among ESG classes is still open. Here, we focus on understanding the dependence structures of different ESG class indices and the market index through the lens of copula models. After a thorough introduction to vine copula models, we explain how cross-sectional and temporal dependencies can be captured by models based on vine copulas, more specifically, using ARMA-GARCH and stationary vine copula models. Using real-world ESG data over a long period with different economic states, we find that assets with medium ESG scores tend to show weaker dependence to the market, while assets with extremely high or low ESG scores tend to show stronger, non-Gaussian dependence.http://www.sciencedirect.com/science/article/pii/S240591882200016200001111 |
| spellingShingle | Claudia Czado Karoline Bax Özge Sahin Thomas Nagler Aleksey Min Sandra Paterlini Vine copula based dependence modeling in sustainable finance Journal of Finance and Data Science 0000 1111 |
| title | Vine copula based dependence modeling in sustainable finance |
| title_full | Vine copula based dependence modeling in sustainable finance |
| title_fullStr | Vine copula based dependence modeling in sustainable finance |
| title_full_unstemmed | Vine copula based dependence modeling in sustainable finance |
| title_short | Vine copula based dependence modeling in sustainable finance |
| title_sort | vine copula based dependence modeling in sustainable finance |
| topic | 0000 1111 |
| url | http://www.sciencedirect.com/science/article/pii/S2405918822000162 |
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