A sustainability transition on the move? Evidence based on the disconnect from market fundamentals

42 Pages Posted: 26 Aug 2022

See all articles by Alessi Lucia

Alessi Lucia

Joint Research Center of the European Commission; Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Dominik Hirschbühl

European Commission - Joint Research Centre

Alessandro Rossi

European Union - European Commission Joint Research Centre-Ispra

Date Written: 11 July, 2022

Abstract

In a context where European stock prices have been trending upwards, one of the main concerns is that stocks perceived as more sustainable from an environmental, social and governance (ESG) perspective could be particularly exposed to exuberance. To shed some light on the magnitude of the deviation of stock prices from fundamentals we apply a Markov-switching augmented version of the present-value model. Using monthly data on the European stock market from 2005 to 2022, our model suggests that at the beginning of 2022 the non-fundamental component was about one fourth of the total price. When looking at particular market segments, the model shows that green and ESG stocks behave broadly in line with the market. However, in recent years ESG stocks have shown a significant, though small, disconnect from the market. These findings suggest that investor preferences are shifting towards sustainability, while not posing immediate risks to market stability.

Keywords: Bayesian inference, European stock market, green transition, Markov-switching, present-value model

JEL Classification: C11, C32, G12

Suggested Citation

Lucia, Alessi and Hirschbühl, Dominik and Rossi, Alessandro, A sustainability transition on the move? Evidence based on the disconnect from market fundamentals (11 July, 2022). Available at SSRN: https://ssrn.com/abstract=4186275 or http://dx.doi.org/10.2139/ssrn.4186275

Alessi Lucia

Joint Research Center of the European Commission ( email )

Via E. Fermi 2749
Ispra (VA), I-21027
Italy

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES) ( email )

U6 Building
Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

Dominik Hirschbühl (Contact Author)

European Commission - Joint Research Centre

Via E. Fermi 2749
Ispra, 21027
Italy

Alessandro Rossi

European Union - European Commission Joint Research Centre-Ispra ( email )

Via Fermi
Ispra, Varese 21027
Italy

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