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Michael123
Michael123
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I have observed that my portfolios constructed according to positive ESG criteria consistently show negative alphas and positive momentum, while the portfolios with negative ESG criteria show positive alphas and negative momentum.

I'm not sure how to interpret this correctly in economic terms:

Would be this interpretation correct?:

One reason could be that the portfolio with negative ESG criteria had below average returns in the past and was therefore under pressure, which led to an undervaluation of the stocks, which later reversed and led to the positive alpha.

Portfolio construction: I used the FF5 plus momentum. I first sorted my stocks by their annual ESG scores. Then I created a portfolio based on the ESG quantiles of the companies and let it run for 7 years. Each year I rebalanced the portfolios based on the ESG scores and quantiles. I then regressed the monthly returns on the FF factors. I noticed that the portfolios with higher ESG scores in particular have a negative alpha and positive momentum, while the portfolios with more negative ESG scores have a positive alpha and negative momentum (both always significant).

Thanks in advance

Greetings

I have observed that my portfolios constructed according to positive ESG criteria consistently show negative alphas and positive momentum, while the portfolios with negative ESG criteria show positive alphas and negative momentum.

I'm not sure how to interpret this correctly in economic terms:

Would be this interpretation correct?:

One reason could be that the portfolio with negative ESG criteria had below average returns in the past and was therefore under pressure, which led to an undervaluation of the stocks, which later reversed and led to the positive alpha.

Thanks in advance

Greetings

I have observed that my portfolios constructed according to positive ESG criteria consistently show negative alphas and positive momentum, while the portfolios with negative ESG criteria show positive alphas and negative momentum.

I'm not sure how to interpret this correctly in economic terms:

Would be this interpretation correct?:

One reason could be that the portfolio with negative ESG criteria had below average returns in the past and was therefore under pressure, which led to an undervaluation of the stocks, which later reversed and led to the positive alpha.

Portfolio construction: I used the FF5 plus momentum. I first sorted my stocks by their annual ESG scores. Then I created a portfolio based on the ESG quantiles of the companies and let it run for 7 years. Each year I rebalanced the portfolios based on the ESG scores and quantiles. I then regressed the monthly returns on the FF factors. I noticed that the portfolios with higher ESG scores in particular have a negative alpha and positive momentum, while the portfolios with more negative ESG scores have a positive alpha and negative momentum (both always significant).

Thanks in advance

Greetings

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Michael123
Michael123
  • 13
  • 4

Interpretation of significant positive Alpha and negative Momentum

I have observed that my portfolios constructed according to positive ESG criteria consistently show negative alphas and positive momentum, while the portfolios with negative ESG criteria show positive alphas and negative momentum.

I'm not sure how to interpret this correctly in economic terms:

Would be this interpretation correct?:

One reason could be that the portfolio with negative ESG criteria had below average returns in the past and was therefore under pressure, which led to an undervaluation of the stocks, which later reversed and led to the positive alpha.

Thanks in advance

Greetings