Seminar "Selected Topics in Finance"

Preface

The seminar is open to Master students.

In this seminar, we will study current finance research related to ESG (=EnvironmentalSocialGovernance) investing.  See the topics below for more information.

To successfully pass the seminar you need to write a paper and give a presentation. Papers should be written in English and should have a length of 15-20 (team of two) or 20-25 pages (team of three). For hints on how to write a paper see our guidelines. The seminar talks will be in English.

Please contact your supervisor to discuss the outline of your paper, your empirical part (if any), and any questions that you may have. For organizational questions, please ask Syed Wasif Hussain.

Relevant Information will be made Available via the Moodle page. 

FAQ & Organisational matters

  • Do we get a grade? Yes. Your paper and your presentation will be graded and lead to one grade (equally weighted). Both the paper and presentation have to be passed.
  • What do we have to hand in? An outline of your paper to discuss the content of your paper and your final paper one week before the presentation.
  • Who is responsible? For content-related questions, please contact your supervisor. For organizational questions, please ask Syed Wasif Hussain.

Time Table

  • Mon. 31.01.2022 - Fri. 04.02.2022 Students must submit their preferences over seminars for the first matching round.
    http://econ.mathematik.uni-ulm.de:3838/semapps/stud_en/   (English)
  • http://econ.mathematik.uni-ulm.de:3838/semapps/stud_de/   (German)
  • Sat. 05.02.2022 1st round of seminar matching.
  • Wed. 09.02.2022 2nd round of seminar matching.
  • Fri. 11.02.2022, 15:00 General information and Q&A session about the Seminar (Zoom link emailed on Thursday 10.02.2022)  
  • Friday. 11.02.2022 - Sunday 27.02.2022Topic allocation on Taddle
  • Fri. 01.04.2022 - Sun. 24.04.2022 Registration at the Higher Services Portal
  • Until Fri. 29.04.2022 Contact your supervisor to discuss the outline of the paper
  • Mon. 20.06.2022 by 12pm Submission of the paper on Moodle
  • Fri. 24.06- Sat. 25.06.2022 Presentations (Venue tba)

Topics

 

1.    The ESG-efficient frontier
Asset owners and portfolio managers overseeing trillions of dollars seek to incorporate environmental, social, and governance (ESG) considerations into their investment process. However, they have little guidance in how to incorporate ESG in portfolio choice and, worse, opinions differ dramatically across academics and practitioners about whether ESG will help or hurt their performance. Your task is to summarize the findings of Pedersen et al. (2021) and then recreate their analysis from Table 1-3.

Literature to get started:
Pedersen, L.H., Fitzgibbons, S. and Pomorski, L., 2021. Responsible investing: The ESG-efficient frontier. Journal of Financial Economics, 142(2), pp.572-597.

      Supervisor: Syed Wasif Hussain

      Students: Anna Papp, Lena Schwenke and Rayan El Hajal

 

2.    Tackling the Problem of Noise
A plethora of recent studies on sustainable investment come to different conclusions regarding how strongly and in which direction stock returns are related to a company's environmental and social performance. According to a recent study by Berg et al. (2021) this may also be due to the underlying noise in ESG ratings. The authors show that a corrected estimate of these ratings has a significantly stronger effect on stock returns compared to previous results.
Shortly introduce ESG rating approaches and indicators used by different ESG data providers. Discuss potential sources of noise in ESG ratings. Further introduce Instrumental Variables and summarize the findings of Berg et al. (2021). In your empirical analysis, you should focus on the ESG ratings provided by Refinitiv. In the first step, establish the effect of ESG ratings on expected stock returns in the US using OLS. Further, apply the Instrumental Variable approach by using lagged ESG ratings as instruments. How do your results compare to the results from Berg et al. (2021)?

Literature to get started:
Berg, F., Kölbel, J. F., Pavlova, A., & Rigobon, R. (2021). ESG Confusion and Stock Returns: Tackling the Problem of Noise. Available at SSRN: ssrn.com/abstract=3941514

      Supervisor: Niklas Paluskiewicz

      Students: Janna Eisenhut and Haiqing Jie


3.    Investigating the ESG Alpha

Investors are increasingly concerned with integrating environmental, social and governance criteria when constructing their equity portfolios. Among other things such as aligning portfolios with investors’ values and norms or making a social impact by pushing companies to act responsibly, one of the key motivation for this is to generate performance by favoring ESG leaders. ESG is often perceived as a source of outperformance and ESG providers are fond of endorsing this perception. A lot of recent publications claims that ESG strategies generate outperformance. But is there really a performance benefit for the investor? Summarize the findings of Bruno et al. (2021) and then recreate their analysis.

Literature to get started:
Bruno, G., Esakia, M. and Goltz, F., 2021. “Honey, I Shrunk the ESG Alpha”: Risk-Adjusting ESG Portfolio Returns. The Journal of Investing.

      Supervisor: Syed Wasif Hussain

      Students: Fabian Hoch, Vedant Khanna and Xinyue Rao

 

4.    Dissecting Green Returns
Investing in green stocks has become increasingly popular over the last decade. The raise in awareness towards these stocks has driven up prices and in turn realized returns. However, if this outperformance will continue in the future is not so clear-cut. Pastor et al. (2021) argue that absent of strengthened climate concerns, it is more likely that green stocks will underperform brown stocks going forward.  
The first part of your seminar thesis should introduce the study of Pastor et al. (2021) and summarize their main findings. Here you should focus on the questions why realized returns might be a poor estimator for expected returns in this setup and also on the drivers behind the outperformance of the green factor. The empirical part of your paper should start with a comparison of the performance of green and brown stocks in the US. Use Refinitv’s Environmental Score to distinguish between green and brown firms. Also construct a green factor based on the methodology of Pastor et al. (2021). Can this factor explain the underperformance of value stocks in recent years? How is it related to other factors commonly used in the literature? Additional: Check how individual stocks/indices are related to your green factor.

Literature to get started:
Pastor, L., Stambaugh, R. F., & Taylor, L. A. (2021). Dissecting Green Returns (No. w28940). National Bureau of Economic Research (NBER): https://nber.org/papers/w28940

      Supervisor: Niklas Paluskiewicz

      Students: 

 

5.    ESG Investments: Filtering versus Machine Learning Approaches

The relationship between corporate social and financial performances is fairly an old theme in economic research. In its earlier stages, it has met quite deep skepticism and critics: Nobel prize-winning economist Milton Friedman wrote in the New York Times Magazine, back in the 1970’, that ”... there is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud....” (Friedman 1970). The current approach now seems completely opposed to Friedman’s one, and the most recent empirical literature highlights the link between ESG performance and alpha. Nonetheless, the question still remains: can simple ESG screenings be enough to find an alpha or do we need a non-linear mechanism to link financial performance to ESG features? Your task is to summarize the findings of Margot et al. 2021 and then recreate Table 10 and Figure 1 using an Index of your choosing.


Basic knowledge of Machine learning is recommended for this topic.


Literature to get started:
Margot, V., Geissler, C., de Franco, C. and Monnier, B., 2021. ESG Investments: Filtering versus Machine Learning Approaches. Applied Economics and Finance, 8(2), pp.1-16.

      Supervisor: Syed Wasif Hussain

      Students: Luca Woitzik 

 

6.    Responsible Investing around the world
In an extended study involving 49 emerging and developed markets, Cakici & Zaremba (2021) find that the environmental, social, and governance ratings negatively predict future stock returns. However, once controlled for a company’s size, the relation is flat. Indicating that there is no ‘true’ underlying effect of a company’s sustainable performance on its returns.
First summarize the findings of Cakici & Zaremba (2021). Then partly replicate their study for a subsample of countries of your choice. In particular, your analysis should focus on Exhibit 3 (Panel A and B), 4-7 and 12.

Literature to get started:
Cakici, N., & Zaremba, A. (2021). Responsible Investing: ESG Ratings and the Cross-Section of International Stock Returns. Available at SSRN: ssrn.com/abstract=3922312

      Supervisor: Niklas Paluskiewicz

      Students: Yetkin Pala, Kanak Chandra Bosu and Nikolay Kirpichnikov


7.    ESG score prediction

Changing behaviors towards sustainability issues of the global community and the availability of environmental, social and governance (ESG) indicators are attracting investors to socially responsible investment decisions. However ESG ratings may not always be available. Can these ESG ratings be predicted using structural data- balance sheet items? Your task is to summarize the findings of D’Amato et al (2021) and then recreate the empirical analysis in Section 4 using an index of your choice.


Basic knowledge of Machine learning is recommended for this topic.


Literature to get started:
D’Amato, V., D’Ecclesia, R. & Levantesi, S. ESG score prediction through random forest algorithm. Comput Manag Sci (2021). doi.org/10.1007/s10287-021-00419-3

      Supervisor: Syed Wasif Hussain

      Students: Brishna Riaz, Kamyar Keshavarz Hedayati and Misbahuddin Mohammed


8.    Costs to sustainable investing
Theory suggests that ESG related investment strategies may come at a cost, as sustainable investors require lower expected returns for holding stocks of companies with high ESG ratings and for protection against sustainability risks. However, in their recent work Lindsey et al. (2021) find opposing results. Portfolios with a tilt towards sustainable companies show only negligible lower performance when compared to performance optimized portfolios in the US.
Outline the study of Lindsey et al. (2021) and summarize their results. In your own analysis, use a traditional multifactor model instead of the IPCA approach to construct portfolio weights. How does performance compare to a portfolio tilted towards high-ESG companies, e.g. by screening out low-ESG companies? Focus your analysis on the US.

Literature to get started:
Lindsey, L. A., Pruitt, S. & Schiller, C. (2021). The Cost of ESG Investing. Available at SSRN: ssrn.com/abstract=3975077

      Supervisor: Niklas Paluskiewicz

      Students: Erjon Albrahimi, Sharang Rastogi and Stefan Rausch