Do Green and Dual-Listed Stocks Mitigate Downside Risk?

Abstract

A new stock pricing framework that generalizes negative returns by focusing on downward movements of a market is downside risk which leads investors to seek compensation for holding stocks with negative returns. This study provides an in-depth analysis of how green stocks act as a hedging tool for diversifying downside risk.  This study compares the performance of dual-class and locally listed green and non-green stocks to measure whether the greenness of securities provides a premium to investors for mitigating downside risk. Results proved that the greenness of stocks reduces the downside risk for both cross-listed and local stocks by a significant value compared to non-green stocks. However, dual-listed stocks are less vulnerable to downside risk than local stocks. On the other hand, multiple company and economy-based factors are also measured to evaluate their robust role in determining downside risk.   Findings proved that size, growth, and liquidity are strong determinants of downside risk. Inflation rate, interest rate, and exchange rate contribute highly to determining downside risk. On the other hand, the book-to-market ratio, FDI, and GDP emerged as an insignificant determinant of downside risk.