Superiority of Esg-Oriented Portfolios in Taiwan Stock Market: Quantile-on-Quantile with GARCH Approach

Abstract

The growing consensus regarding the need to mitigate climate risk threats has led to trading in assets oriented toward improving environment, social, and governance (ESG) ratings becoming a key focus worldwide. This study employs the novel Quantile-on-Quantile with GARCH model to compare the performance of ESG-based portfolios in the Taiwan stock market from 2016 to 2022. We construct annually rebalanced portfolios on the basis of quintile ESG scores. Our findings indicate that the resilience of portfolios with high ESG ratings deteriorates in bearish markets and that the long-term returns of portfolios with high ESG ratings exhibit reversal phenomena. Furthermore, our findings provide support for the resilience effect and overreaction hypothesis, and therefore, they have key implications for investors, relevant practitioners, and policymakers.

Keywords: ESG Ratings, Portfolios, Quantile-on-Quantile, Quantile VAR