Essays on responsible investment, research output analyses and investment performance evaluation

Abstract

This thesis includes four essays, of which each comprises two original contributions. Based on this thesis’ eight contributions, we add knowledge or understanding to the literatures on responsible investment, research output analyses and investment performance evaluation. First, we develop the first generic, reliable approach to benchmark research area output (e.g. journal articles or books), which we expect to appeal to governments’ increasing interest in monitoring their research funding investments. Second, we apply this approach to the research area of responsible investment, which is currently backed by an about $ 7 trillion industry. We find that the (quality weighted) quantity of responsible investment’s research output is statistically significantly under-proportional compared with peer research areas. One of several explanations for this result lies in the intransparency of the current responsible investment literature. Third, we develop an approach to research synthesis, which improves a research area’s transparency without experiencing many weaknesses of conventional literature reviews. We title this approach Influential Literature Analysis (ILA). Fourth, we apply ILA to the relatively intransparent responsible investment literature. One of our many findings is that responsible assets with their ceteris paribus under-proportional total risk might appear artificially unattractive when assessed by the most common investment performance measure, the Sharpe ratio, which is biased in favour of high risk assets due to its currently unsolved negative excess return problem. Fifth, we develop a generic, reliable and robust solution to the negative Sharpe ratio problem, which investors can customise according to their specific increasing incremental disutility of risk functions. Six, we generalise our solution to the negative Sharpe ratio problem, which allows us to solve the negative (excess) return problems of over twenty other investment performance measures. Seventh, we develop independent, statistically sophisticated tests of the sufficiency and quality of suggested solutions to the negative Sharpe ratio problem, since all existing tests a-priori assume the superiority of a specific solution. In contrast, our tests are only based on the Sharpe ratio itself and two basic axioms of investment theory. Hence, they are conceptually unrelated to our solutions. Eighth, we apply these tests using two different data samples to all existing solutions to the negative Sharpe ratio problem. We find that investors are best advised to use our solutions, the H⁶-, H⁷- or H⁸-measure, in their evaluation of investment performance from a Sharpe ratio like perspective.