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ESG Metrics: Exploring their Role in Predicting Systemic Risks in the European Financial System

Bayramov, Ibad LU and Nguyen, Trang LU (2024) NEKN02 20241
Department of Economics
Abstract
The study aims to explore the relationship between European financial banks' ESG pillars and their contribution to systemic risk, with a focus on the Eurozone banking industry. Utilizing the €ΔCoVaR metric to capture systemic risk, we analyzed a sample of 35 publicly listed banks across 12 European Union countries for the period of 2019 to 2023. The methodology consists of three steps. The first step is estimating VaR for each bank using the Basic Historical Simulation method. The VaR results will allow for the computation of CoVaR, ΔCoVaR, and €ΔCoVar. The last step is to analyze the relationship between ESG and €∆CoVaR.

Our primary hypothesis (H0) posited that banks with higher ESG would contribute less to systemic risk; however, our... (More)
The study aims to explore the relationship between European financial banks' ESG pillars and their contribution to systemic risk, with a focus on the Eurozone banking industry. Utilizing the €ΔCoVaR metric to capture systemic risk, we analyzed a sample of 35 publicly listed banks across 12 European Union countries for the period of 2019 to 2023. The methodology consists of three steps. The first step is estimating VaR for each bank using the Basic Historical Simulation method. The VaR results will allow for the computation of CoVaR, ΔCoVaR, and €ΔCoVar. The last step is to analyze the relationship between ESG and €∆CoVaR.

Our primary hypothesis (H0) posited that banks with higher ESG would contribute less to systemic risk; however, our findings indicate a positive correlation, diverging from pre-pandemic studies which generally reported a negative link. Our secondary hypothesis (H1) examined the distinct
impacts of individual ESG pillars on systemic risk, revealing that while the environmental and social pillars have positive impact on systemic risk, the governance pillar shows a comparatively weaker association with systemic risk. (Less)
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author
Bayramov, Ibad LU and Nguyen, Trang LU
supervisor
organization
course
NEKN02 20241
year
type
H1 - Master's Degree (One Year)
subject
keywords
ESG, systemic risk, European Union, financial stability, Value at Risk (VaR), CoVaR, ΔCoVaR, quantile regression, basic historical simulation.
language
English
id
9156433
date added to LUP
2024-08-12 15:55:00
date last changed
2024-08-12 15:55:00
@misc{9156433,
  abstract     = {{The study aims to explore the relationship between European financial banks' ESG pillars and their contribution to systemic risk, with a focus on the Eurozone banking industry. Utilizing the €ΔCoVaR metric to capture systemic risk, we analyzed a sample of 35 publicly listed banks across 12 European Union countries for the period of 2019 to 2023. The methodology consists of three steps. The first step is estimating VaR for each bank using the Basic Historical Simulation method. The VaR results will allow for the computation of CoVaR, ΔCoVaR, and €ΔCoVar. The last step is to analyze the relationship between ESG and €∆CoVaR.
 
Our primary hypothesis (H0) posited that banks with higher ESG would contribute less to systemic risk; however, our findings indicate a positive correlation, diverging from pre-pandemic studies which generally reported a negative link. Our secondary hypothesis (H1) examined the distinct 
impacts of individual ESG pillars on systemic risk, revealing that while the environmental and social pillars have positive impact on systemic risk, the governance pillar shows a comparatively weaker association with systemic risk.}},
  author       = {{Bayramov, Ibad and Nguyen, Trang}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{ESG Metrics: Exploring their Role in Predicting Systemic Risks in the European Financial System}},
  year         = {{2024}},
}