A1233
Title: Green assets, risk preferences and portfolio selection with sustainability
Authors: Lebogang Mateane - University of Cape Town (South Africa)
Ibrahim Tahri - International Institute for Applied Systems Analysis (IIASA) (Austria) [presenting]
Willi Semmler - New School for Social Research (United States)
Abstract: A streamlined framework specifically designed for risk-averse green investors is presented with the goal of fostering sustainable and environmentally responsible production processes. This framework is crafted to resonate with the increasing global appetite for green investments among a diverse group of market participants, including institutional investors, asset managers, central banks, and sovereign wealth funds. The approach involves profiling green investors who closely monitor and respond to short-term global financial uncertainty, as quantified by the Chicago Board Options Exchange Volatility Index (VIX). The uncertainty is modeled using a two-state Markov process, differentiating between periods of high and low volatility. These distinct states of financial uncertainty drive changes in investors' preferences, shifting between approximated CRRA (Constant Relative Risk Aversion) and IRRA (Increasing Relative Risk Aversion) expected utilities. This shift influences portfolio reallocations, moving investments away from carbon-intensive (brown) assets toward sustainable (green) assets. CRRA expected utility is associated with periods of low financial uncertainty, while IRRA expected utility aligns with high volatility periods. The model incorporates higher moments of green asset returns into the approximated CRRA and IRRA expected utilities, highlighting investors' preference for positively skewed portfolios, particularly those that emphasize renewable energy assets.
