Implied Tail Risk and ESG Ratings
This paper explores whether the high or low ESG rating of a company is related to the level of its implied tail risk, measured on the basis of derivative data by implied skewness and implied kurtosis. Previous research suggests that the ESG rating of a company is indeed connected to some financial r...
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| Format: | Article |
| Language: | English |
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MDPI AG
2021-07-01
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| Series: | Mathematics |
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| Online Access: | https://www.mdpi.com/2227-7390/9/14/1611 |
| _version_ | 1797526685246029824 |
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| author | Jingyan Zhang Jan De Spiegeleer Wim Schoutens |
| author_facet | Jingyan Zhang Jan De Spiegeleer Wim Schoutens |
| author_sort | Jingyan Zhang |
| collection | DOAJ |
| description | This paper explores whether the high or low ESG rating of a company is related to the level of its implied tail risk, measured on the basis of derivative data by implied skewness and implied kurtosis. Previous research suggests that the ESG rating of a company is indeed connected to some financial risk; however, often, only volatility is used as a risk measure. We examined the relation between ESG ratings and implied volatility, and explore the relation between ESG ratings and financial risk in more depth by looking into higher implied moments accessing financial tail risk. First, we found that higher ESG rated companies have a lower implied volatility connected with them, and exhibit more negative implied skewness and higher implied kurtosis. In other words, we observed a higher negative tail risk for higher ESG rated companies. However, on a midsized company data set, we found that higher ESG rated companies both have lower implied volatility, and exhibit less negative implied skewness and lower implied kurtosis. Hence, negative tail risk is typically lower for high ESG rated companies. Our study further investigated similar effects on individual environmental (E), social (S) and governance (G) scores of the involved companies. Second, we examined whether such a kind of trend exists for different sectors. Our results indicate that the influence of ESG ratings on implied volatility exhibits a similar trend, except for the industrial, information services, and real estate sectors, while for the materials, healthcare, and communication services sectors, the influence of ESG ratings on implied skewness and implied kurtosis is less pronounced. Moreover, the results show that the ESG ratings are correlated with implied moments for companies in consumer discretionary sectors. |
| first_indexed | 2024-03-10T09:33:51Z |
| format | Article |
| id | doaj.art-e58217acc53643f4aea99d1bc34d5cab |
| institution | Directory Open Access Journal |
| issn | 2227-7390 |
| language | English |
| last_indexed | 2024-03-10T09:33:51Z |
| publishDate | 2021-07-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Mathematics |
| spelling | doaj.art-e58217acc53643f4aea99d1bc34d5cab2023-11-22T04:19:31ZengMDPI AGMathematics2227-73902021-07-01914161110.3390/math9141611Implied Tail Risk and ESG RatingsJingyan Zhang0Jan De Spiegeleer1Wim Schoutens2Department of Mathematics, KU Leuven, Celestijnenlaan 200B, 3001 Leuven, BelgiumDepartment of Mathematics, KU Leuven, Celestijnenlaan 200B, 3001 Leuven, BelgiumDepartment of Mathematics, KU Leuven, Celestijnenlaan 200B, 3001 Leuven, BelgiumThis paper explores whether the high or low ESG rating of a company is related to the level of its implied tail risk, measured on the basis of derivative data by implied skewness and implied kurtosis. Previous research suggests that the ESG rating of a company is indeed connected to some financial risk; however, often, only volatility is used as a risk measure. We examined the relation between ESG ratings and implied volatility, and explore the relation between ESG ratings and financial risk in more depth by looking into higher implied moments accessing financial tail risk. First, we found that higher ESG rated companies have a lower implied volatility connected with them, and exhibit more negative implied skewness and higher implied kurtosis. In other words, we observed a higher negative tail risk for higher ESG rated companies. However, on a midsized company data set, we found that higher ESG rated companies both have lower implied volatility, and exhibit less negative implied skewness and lower implied kurtosis. Hence, negative tail risk is typically lower for high ESG rated companies. Our study further investigated similar effects on individual environmental (E), social (S) and governance (G) scores of the involved companies. Second, we examined whether such a kind of trend exists for different sectors. Our results indicate that the influence of ESG ratings on implied volatility exhibits a similar trend, except for the industrial, information services, and real estate sectors, while for the materials, healthcare, and communication services sectors, the influence of ESG ratings on implied skewness and implied kurtosis is less pronounced. Moreover, the results show that the ESG ratings are correlated with implied moments for companies in consumer discretionary sectors.https://www.mdpi.com/2227-7390/9/14/1611ESG ratingsimplied tail riskimplied moments |
| spellingShingle | Jingyan Zhang Jan De Spiegeleer Wim Schoutens Implied Tail Risk and ESG Ratings Mathematics ESG ratings implied tail risk implied moments |
| title | Implied Tail Risk and ESG Ratings |
| title_full | Implied Tail Risk and ESG Ratings |
| title_fullStr | Implied Tail Risk and ESG Ratings |
| title_full_unstemmed | Implied Tail Risk and ESG Ratings |
| title_short | Implied Tail Risk and ESG Ratings |
| title_sort | implied tail risk and esg ratings |
| topic | ESG ratings implied tail risk implied moments |
| url | https://www.mdpi.com/2227-7390/9/14/1611 |
| work_keys_str_mv | AT jingyanzhang impliedtailriskandesgratings AT jandespiegeleer impliedtailriskandesgratings AT wimschoutens impliedtailriskandesgratings |