Exploiting ESG Information by Extending Conventional Smart Beta Strategies: An Empirical Analysis of Portfolio Performances through the Booms and Busts in the European Equity Market

Joakim Hurum Austmo & HÃ¥kon Masst Eikeland

Student thesis: Master thesis

Abstract

This study investigates how portfolio construction- and investment principles, such as incorporation of ESG information in decision making, can be applied to enhance stock portfolio performances in the European Equity markets. The authors find that portfolios constructed with equal weights in combination with a buy and hold strategy yield better result relative to a benchmark, while incorporation of ESG growth information further enhances performances. On a more granular level, the authors confirm the notion that small-cap stock portfolios outperform large-cap stock portfolios in periods of economic prosperity, while there is no evidence to suggest the opposite during periods of economic hardship. The authors also find that the extension of the Fama-French three-factor model with an ESG growth risk factor improves its ability to explain portfolio returns, especially towards the end of the investment period. Evidence from conventional and extended models source more of the experienced overperformance in small-cap portfolios to the size effect anomaly, while large-cap portfolio returns are more prominently captured by the ESG growth risk factor.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final ThesisMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2021
Number of pages146