Predictive Power of ESG Factors for DAX ESG 50 Index Forecasting Using Multivariate LSTM

Kód výsledku v IS VaVaI

<a href="https://www.isvavai.cz/riv?ss=detail&h=RIV%2F04274644%3A_____%2F25%3A%230001259" target="_blank" >RIV/04274644:_____/25:#0001259 - isvavai.cz</a>

Výsledek na webu

<a href="https://www.mdpi.com/2227-7072/13/3/167" target="_blank" >https://www.mdpi.com/2227-7072/13/3/167</a>

DOI - Digital Object Identifier

<a href="http://dx.doi.org/10.3390/ijfs13030167" target="_blank" >10.3390/ijfs13030167</a>

Jazyk výsledku

angličtina

Název v původním jazyce

Predictive Power of ESG Factors for DAX ESG 50 Index Forecasting Using Multivariate LSTM

Popis výsledku v původním jazyce

As investors increasingly use Environmental, Social, and Governance (ESG) criteria, a key challenge remains: ESG data is typically reported annually, while financial markets move much faster. This study investigates whether incorporating annual ESG scores can improve monthly stock return forecasts for German DAX-listed firms. We employ a multivariate long short-term memory (LSTM) network, a machine learning model ideal for time series data, to test this hypothesis over two periods: an 8-year analysis with a full set of ESG scores and a 16-year analysis with a single disclosure score. The evaluation of model performance utilizes standard error metrics and directional accuracy, while statistical significance is assessed through paired statistical tests and the Diebold–Mariano test. Furthermore, we employ SHapley Additive exPlanations (SHAP) to ensure model explainability. We observe no statistically significant indication that incorporating annual ESG data enhances forecast accuracy. The 8-year study indicates that using a comprehensive ESG feature set results in a statistically significant increase in forecast error (RMSE and MAE) compared to a baseline model that utilizes solely historical returns. The ESG-enhanced model demonstrates no significant performance disparity compared to the baseline across the 16-year investigation. Our findings indicate that within the one-month-ahead projection horizon, the informative value of low-frequency ESG data is either fully incorporated into the market or is concealed by the significant forecasting capability of the historical return series. This study’s primary contribution is to demonstrate, through out-of-sample testing, that standard annual ESG information holds little practical value for generating predictive alpha, urging investors to seek more timely, alternative data sources.

Název v anglickém jazyce

Predictive Power of ESG Factors for DAX ESG 50 Index Forecasting Using Multivariate LSTM

Popis výsledku anglicky

As investors increasingly use Environmental, Social, and Governance (ESG) criteria, a key challenge remains: ESG data is typically reported annually, while financial markets move much faster. This study investigates whether incorporating annual ESG scores can improve monthly stock return forecasts for German DAX-listed firms. We employ a multivariate long short-term memory (LSTM) network, a machine learning model ideal for time series data, to test this hypothesis over two periods: an 8-year analysis with a full set of ESG scores and a 16-year analysis with a single disclosure score. The evaluation of model performance utilizes standard error metrics and directional accuracy, while statistical significance is assessed through paired statistical tests and the Diebold–Mariano test. Furthermore, we employ SHapley Additive exPlanations (SHAP) to ensure model explainability. We observe no statistically significant indication that incorporating annual ESG data enhances forecast accuracy. The 8-year study indicates that using a comprehensive ESG feature set results in a statistically significant increase in forecast error (RMSE and MAE) compared to a baseline model that utilizes solely historical returns. The ESG-enhanced model demonstrates no significant performance disparity compared to the baseline across the 16-year investigation. Our findings indicate that within the one-month-ahead projection horizon, the informative value of low-frequency ESG data is either fully incorporated into the market or is concealed by the significant forecasting capability of the historical return series. This study’s primary contribution is to demonstrate, through out-of-sample testing, that standard annual ESG information holds little practical value for generating predictive alpha, urging investors to seek more timely, alternative data sources.

Druh

J_imp - Článek v periodiku v databázi Web of Science

CEP obor

—

OECD FORD obor

50200 - Economics and Business

Projekt

—

Návaznosti

I - Institucionalni podpora na dlouhodoby koncepcni rozvoj vyzkumne organizace

Rok uplatnění

2025

Kód důvěrnosti údajů

S - Úplné a pravdivé údaje o projektu nepodléhají ochraně podle zvláštních právních předpisů

Název periodika

International Journal of Financial Studies

ISSN

2227-7072

e-ISSN

—

Svazek periodika

13

Číslo periodika v rámci svazku

3

Stát vydavatele periodika

CH - Švýcarská konfederace

Počet stran výsledku

24

Strana od-do

1-24

Kód UT WoS článku

001580077500001

EID výsledku v databázi Scopus

2-s2.0-105017032140