Quantifying Risk in Traditional Energy and Sustainable Investments
Round 1
Reviewer 1 Report
The article analyses the impact for investors of the main energy sources. I think it is a very comprehensive article that deals with aspects of finance although it needs to be ordered in a more coherent way in order to be considered for publication.
The article should compose the different points:
1. Introduction. It should contain the presentation of the article and the analysis of the literature on the same subject. The first point of the revised article contains bibliographic analyses and is repeated in the second point.
2. Objectives and methodology. It is important to introduce the objective of the research.
3. Results and discussion of the results. They must have an argumental thread.
4. Conclusions. It should contain the novelties obtained in the research.
It is very important that the article is ordered (even if it doesn't have only these points). The article looks very complete at a scientific level but the thread is not appropriate. It lacks a point of conclusions (obligatory), where the main novelties contributed in the research are exposed.
A discussion comparing with other authors is needed.
In the end of the manuscript I think is important to present the recommendations for future studies.
References should be expanded and a larger number of the MDPI group should be entered.
I propose to modify it so that it can be accepted for publication in Sustainability journal.
Author Response
Quantifying risk in traditional energy and sustainable investments
Manuscript ID sustainability-419051
Responses to the report of Reviewer I
First of all, we would like to thank you for your kind and helpful comments and suggestions that helped us improve the document.
On the main concern:
In your comments you suggest that the paper needs to be ordered in a more coherent way and propose that the paper should be composed of four points: Introduction, Objectives and Methodology, Results and Discussion of Results, and Conclusions.
In this sense, we would like to point out that the structure of the article responds to your proposal, although some of the points are subdivided into two sections.
As for the first point, Introduction, it would correspond to our first two sections: 1. Introduction and 2. Literature review. The idea is to present a clear and concise Introduction, in which the article is motivated, the objective, contribution, methodology and main results of the paper are presented, leaving the revision of the literature for section 2. Although there is no problem with including the literature review in the Introduction, as you suggest, please note that the structure we have adopted is used in many articles. For example, this structure is used in one of the articles we are suggested to cite from the Sustainability journal (Le and Wang, 2017, “The Integrated Approach for Sustainable Performance Evaluation in Value Chain of Vietnam Textile and Apparel Industry”, Sustainability, 9, 477).
With respect to the second point (2. Objectives and methodology), this corresponds to our Section 3. Model and methodology and Section 4. Data. In response to your suggestion that we introduce the objectives of the research, we have clarified and highlighted the purpose of the work in the Introduction (end of the first paragraph and third paragraph) and have added a full paragraph at the beginning of Section 3.
Our results have clearly a strong statistical component but following your suggestion we have decided to leave these more quantitative arguments in Section 5 now titled Statistical results. Then, implications that are potentially interesting for policy makers and institutions in general are postponed until Section 6 now titled Discussion, conclusions and future work. This way, we think, the paper reads more easily, and the arguments are presented within a more logical structure. In response to your related comments about the structure and formal presentation of our research, we have included in Section 5 limitations and possible directions for future work.
Thanks for your suggestion about comparing with other authors. Such comparison is implicitly tackled throughout the whole document in the context of measuring risk in portfolios primarily based either on sustainable or on traditional industries. In this regard, notice that we have tested combinations of:
· probabilistic models,
· including (or not) regressors in the conditional variance,
· risk measures (VaR and ES), and
· backtesting procedures (binomial or multinomial-based),
being each of these possibilities proposed/studied by different authors as we acknowledge in Section 2. Then in Section 5 we draw the main results about the comparison among the procedures with conclusions in this same section and in Section 6 as we described above.
Following your advice, we have extended the references, particularly those published by the MDPI group. We have now included the following (highlighted in yellow those in the group):
3. Chen, J.M., On Exactitude in Financial Regulation: Value-at-Risk, Expected Shortfall, and Expectiles, Risks, 2018, vol. 6(2), 1-28. doi:10.3390/risks6020061
4. Fischer, M., Moser, T., Pfeuffer, M. Risks. 2018, 6(4), 142. doi:10.3390/risks6040142
32. Barone Adesi, G. VaR and CVaR Implied in Option Prices. J. Risk Financial Manag. 2016, 9(1), 2. doi.org/10.3390/jrfm9010002.
33. Dobrev, D., Nesmith, T.D., Oh, D.H. Accurate Evaluation of Expected Shortfall for Linear Portfolios with Elliptically Distributed Risk Factors. J. Risk Financial Manag. 2017, 10(1), 5; doi.org/10.3390/jrfm10010005
34. Fuertes, A-M., Olmo, J. On Setting Day-Ahead Equity Trading Risk Limits: VaR Prediction at Market Close or Open? J. Risk Financial Manag. 2016, 9(3), 10. doi.org/10.3390/jrfm9030010
35. Allen, D.E., McAleer, M., Powell, R.J., Singh, A.K. Down-Side Risk Metrics as Portfolio Diversification Strategies across the Global Financial Crisis. J. Risk Financial Manag. 2016, 9(2), 6. doi.org/10.3390/jrfm9020006
36. Yu, X., Sun, H. Optimal Hedging with Options and Futures against Price Risk and Background Risk. Math. Comput. Appl. 2017, 22(1), 5. doi.org/10.3390/mca22010005
39. The Economist Intelligence Unit (2015). The Cost of Inaction: Recognising the Value at Risk from Climate Change. [online] London, New York, Hong Kong, Geneva: The Economist Intelligence Unit Limited. Available at: https://www.eiuperspectives.economist.com/sites/default/files/The%20cost%20of%20inaction_0.pdf [Accessed 20 Aug. 2018].
50. Ghalanos, ] A. Introduction to the rugarch package. (Version 1.3-1), 2015, https://goo.gl/1nsPNP.
55. Pfaff, B., McNeil, A., Pfaff, M. B. Package ‘evir’: Extreme Values in R. R package version 1.7-4. 2018. https://CRAN.R-project.org/package=evir.
61. Khindanova, I., Rachev, S., Schwartz, E. Stable modeling of value at risk. Math. Comput. Model. 2001, 34(9-11), 1223-1259. doi.org/10.1016/S0895-7177(01)00129-7
62. Marinelli, C., D’Addona, S., Rachev, S. A comparison of some univariate models for Value-at-Risk and expected shortfall. Int. J. Theoretical Appl. Finance, 2007, 10 (6), 1043-1075. doi.org/10.1142/S0219024907004548
63. Güner, B., Rachev, S., Edelman, D., Fabozzi, F. J. (2010) Bayesian Inference for Hedge Funds with Stable Distribution of Returns. En Rethinking Risk Measurement and Reporting: Volume II (Ed. K. Böcker), 95-136.
64. Rachev, S., Racheva-Iotova, B., Stoyanov, S. Capturing fat tails. Risk Mag., May 2010, 72-77.
65. Hwang, S., Valls Pereira, P.L. Small sample properties of GARCH estimates and persistence. Eur. J. Finance. 2006, 12 (6-7), 473-494. doi.org/10.1080/13518470500039436
Author Response File: 
Author Response.pdf
Reviewer 2 Report
This study is a complete finance research work which use VaR and Expected Shortfall to test the market risk for fuel commodities and fossil-free stock index. Their topic is interesting, as a research article for its area, I believe this paper is complete. However, for Journal sustainability, I think the authors still need to revise for a few parts, to fit the aim and goal of the current journal.
-Line 48 to 50 "In January 2016, financial regulators propose the use of the ES instead of VaR to prudently capture tail risk and capital adequacy ". Consider there are many readers not in the authors' field, the authors should provide the source of this description as a footnote.
-According to this research, sustainability is just defined as "fossil free" in the financial market. However, this journal is more focus on "studies related to sustainability and sustainable development" (see from the aim and scope), so I suggest the authors should link there study more to the main topic for this journal-- please explain, how your study is related to sustainable development?
-For the conclusion part, besides reporting the main results, there also should be a section discussing the policy or decision implication from this study, e.g., for hedgers, do the results from this research provide more useful or reliable strategies? For policies makers, are there any new policy suggestion for them, especially related to sustainable development?
In one sentence, please modify this manuscript, to make it more suit for the current submitted journal.
Author Response
Quantifying risk in traditional energy and sustainable investments
Manuscript ID sustainability-419051
Responses to the report of Reviewer II
First of all, we would like to thank you for your kind and helpful comments and suggestions that helped us improve the document.
On the main concern:
According to your suggestion, we have revised some parts of the paper to better fit the objective and goal of the journal. Specifically, we have prepared a new Abstract and a new section “6. Discussion, conclusions and future work”. In addition, we have changed several parts of section “1. Introduction” (first, third and seventh paragraphs), section “2. Literature review” (fourth and fifth paragraphs), and section “3. Model and Methodology” (first paragraph).
On the minor concerns:
As for lines 48 to 50 on the financial regulator, a further explanation can be found in the fourth paragraph of section “2. Literature review”. In any case, we have introduced a new sentence and a footnote to improve the understanding of the quoted text (old lines 48 to 50) in the section “1. Introduction” (see footnote 3). An additional footnote is included to help to understand the concept “backtesting” (footnote 2).
As suggested, in the new section “6. Discussion, conclusions and future work” we have added a much more detailed discussion of implications for policy makers and portfolio managers, especially in relation to sustainable development.
Author Response File: Author Response.pdf
Reviewer 3 Report
Please try to write (describe) your results more reader-friendly.
They are rather descriptive. Discussion is not enough and should be extended. Results of other studies should be included and comparisons with other studies should be done.
Text in chapter Analysis of empirical results only describe the statistical testing. What the results bring for the issue? Can you give any recommendations? How can it be used in practice? What should be improved? Is there any impact on the issue? Try to specify it also in Conclusion.
Author Response
Quantifying risk in traditional energy and sustainable investments
Manuscript ID sustainability-419051
Responses to the report of Reviewer III
First of all, we would like to thank you for your kind and helpful comments and suggestions that helped us improve the document.
Following your suggestion, we have tried to make the paper more reader-friendly and have extended the discussion on the implications of the results and their comparison with other studies. Our results have clearly a strong statistical component but following your suggestion we have decided to leave these more quantitative arguments in Section 5 now titled “Statistical results”. Then, implications that are potentially interesting for policy makers and institutions in general are postponed until Section 6 now titled “Discussion, conclusions and future work”. This way, we think, the paper reads more easily, and the arguments are presented within a more logical structure.
Finally, we have tried to answer all your questi
Author Response File: Author Response.pdf
Reviewer 4 Report
The main objective of the present paper is to determine whether or not expected shortfall risk measure (ES) serves as an adequate measure of investment risk in oil, gas and coal investments (as represented by the S&P 500 Oil, gas, and consumable fuel index (TI) and the FTSE sustainable fossil-free stock index (SI)).
The four contributions made by the authors are clearly outlined: lines 57-70.
This topic and the method tested are topical and novel and I am especially impressed by the methodological or statistical rigor displayed by the authors. The article is well written but could be improved by either a professional edit or a careful edit by a native speaking colleague. Although not essential, I trust that it would improve the readability and hopefully drive your citations.
While both interesting and important (and in my opinion worthy of publication as is) there are number of small issues that you might like to consider.
Please see the numbered comments below:
1. You mention crises/ crisis lines 62, 76, 325, 335, 357. It might be better for the reader if you outline these crisis periods more clearly (by name and date). You do mention the subprime crisis (line 325) but your data spans 2006-2018 and this covers a number of important market crises. In line 335 for example, when you refer to figure 4, you mention the crisis period from 2006-2012.
2. The first sentence of the literature review seems to be missing something? There is plenty/an enormous amount/an abundance of academic literature on the modeling of the risk of highly …
3. Also in the literature review, line 133. You mention that literature on the use of ES in the energy industry is scarce. You then review the literature that is available. Would it be possible for you here to mention how/where the use of ES has been used in other industries? And perhaps why it is extendable to the energy industry. One sentence might suffice.
4. You mention R several times but do not provide any reference. As far as I know the general reference for R is:
R Development Core Team. R: A language and environment for statistical computing http://www.R-project.org/ (accessed on dd/mm/yr)
But you might also require references for the other mentions of R below:
a. You mention the stable package for R by Nolan (line 194)
b. You mention the evir package in R (line 218)
5. Other places where you might also consider references: (line 300) “can be found on its website”…If not a reference perhaps you could give the website address.
6. (Line 312) the above mentioned data are obtained from Bloomberg platform…should you give a reference or the site address?
7. Line 456, 12 should be raised (superscript).
8. The term “better off” is used several times in the paper. You might consider using other terms if appropriate s.a. improved/enhanced/strengthened.
9. Line 437 the word “anyway” is perhaps inappropriate…consider using additionally/furthermore/also or some other.
10. Although you do mention future research, you might consider including a brief discussion/section on the limitations.
11. Finally, line 483-484, in the discussion section you mention that the findings are an interesting feature for portfolio and risk managers. I would think that this finding is more than just interesting and you might elaborate more on how/why it could be used by these managers and/or regulators. This finding could also be important for investors as mentioned in the abstract and in the stated contributions (line 57-70).
Please consider expanding this discussion point.
Good luck with your research. I thank you for the opportunity to review your work and sincerely wish you all the best.
Author Response
Quantifying risk in traditional energy and sustainable investments
Manuscript ID sustainability-419051
Responses to the report of Reviewer IV
First of all, we would like to thank you for your kind and helpful comments and suggestions that helped us improve the document. All of them denote a conscientious reading and in-depth analysis of the paper rarely done by a referee. Thank you.
Following your suggestion, the article has been revised by a native English-speaking colleague, as the short deadline set to respond to the four referees has not allowed for another solution.
Comment 1. According to your suggestion, we have homogenized the different references to the crisis period. We refer to it as 2007-2008 global financial crisis.
With regard to the comment “In line 335, for example, when reference is made to figure 4, the crisis period 2006-2012 is mentioned”, it seems to us that this is a misunderstanding, since we are talking about the “financial crisis period (…). However, after such period, particularly since 2012, (…)”. In any case, the new wording must avoid any misinterpretation: “During the 2007-2008 global financial crisis, TI investment value is higher than SI investment. However, after such period, particularly since 2012, SI investment has clearly outperformed TI investment.”
Comment 2. We have followed your recommendation.
Comment 3. The first part of the paragraph to which you refer (fifth part of the section 2) has been expanded with two new sentences. In addition, the fourth paragraph of the same section now includes a new review of papers on ES. Specifically, five recent papers on this subject are briefly discussed.
Comment 4. Following your instructions, we have referenced the three R-packages used in the paper.
Comment 5. The website address is now included in the new footnote 11.
Comment 6. After a bibliographic search, we have replaced the reference to the “Bloomberg platform” with the more common “Bloomberg terminal” and have added a footnote to clarify what it refers to.
Comment 7. We have fixed the problem with this footnote (footnote 16 according to the new numbering).
Comments 8 and 9. In the four sentences in which we used the terms “better off” or “Anyway” we have replaced them with more appropriate terms.
Comment 10. The last paragraph of the new conclusions section is entirely devoted to responding to your suggestion. We include limitations in our work and further research.
Comment 11. According to your suggestion, the second and fourth paragraphs of the conclusions includes comments and implications for investors, portfolio managers and regulators.
Author Response File: Author Response.pdf
