Unravelling risk-reward dynamics: A comparative evaluation of nifty 100 ESG and energy sector indices

This research investigated the performance characteristics Nifty100 ESG index to traditional energy sector indices (Nifty Oil & Gas and Nifty Energy) and the broader Nifty 200 index in the Indian equity market. Using five years of daily log returns from April 2017 to March 2022, the study assessed risk-adjusted returns through metrics like Jensen’s Alpha, Sharpe Ratio, and Treynor Ratio. Preliminary results indicate the Nifty100 ESG index exhibited superior risk-adjusted performance as measured by the Sharpe Ratio, surpassing all other indices under consideration.

Furthermore, the study explored the presence and impact of risk premiums using a GARCH-in-mean model. Findings suggest a significant risk premium embedded within the returns of the Nifty Oil & Gas, Nifty Energy, and Nifty 200 indices. Interestingly, the Nifty100 ESG index did not exhibit a statistically significant risk premium. This divergence warrants further investigation into the distinct risk factors affecting these market segments.

Finally, the study examined the asymmetric impact of news on market volatility using E-GARCH and T-GARCH models. Both models revealed a significant difference in the market’s response to good and bad news, with bad news generally having a more pronounced impact on volatility. The T-GARCH model further highlighted this asymmetry, indicating a negative leverage effect (greater volatility following negative news) for all indices except Nifty Energy, which displayed a unique volatility response pattern. The findings consider the asymmetric volatility when evaluating and modeling the dynamics of these indices.