Price effects after one-day abnormal returns in developed and emerging markets: ESG versus traditional indices

Abstract This paper examines price effects related to one day abnormal returns on the stock market indices of both developed and emerging countries while accounting for differences between environmental, social, governance (ESG), and conventional indices. Using daily data from MSCI family indices from 2007 to 2020 and various methods to avoid methodological bias, the following hypotheses are tested: after one-day abnormal returns, specific price effects (momentum/contrarian) appear (H1) in cases of positive (H1.1) and negative (H1.2) returns, price effects after one-day abnormal returns are stronger in the case of traditional indices as compared to ESG indices (H2), price effects after one-day abnormal returns are stronger during the crisis period (H3), a dynamic trigger approach is more appropriate for defining abnormal returns than a static approach (H4), price effects after one-day abnormal returns are stronger in emerging markets as compared to developed ones (H5). The results are mixed in the case of H1 and provide no evidence in favor of H2-H5. They also show no significant differences between ESG and conventional indices. The types of detected price effects are the same for the cases of ESG and conventional indices; their power is different in some cases. Overall, a strong contrarian effect is observed in the US stock market after one-day abnormal returns; a trading strategy constructed based on this observation could generate profits from trading. The main results offer additional evidence against the Efficient Market Hypothesis and provide implications that can assist practitioners in beating the market.