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Asset Prices and Portfolios with Externalities
[Pricedetermination in the EU ETS market: theory and econometric analysis with market fundamentals]

Author

Listed:
  • Steven D. Baker
  • Burton Hollifield
  • Emilio Osambela
Abstract
Elementary portfolio theory implies that environmentalists optimally hold more shares of polluting firms than non-environmentalists, and that polluting firms attract more investment capital than otherwise identical non-polluting firms through a hedging channel. Pigouvian taxation can reverse the aggregate investment results, but environmentalists still overweight polluters. We introduce countervailing motives for environmentalists to underweight polluters, comparing the implications when environmentalists coordinate to internalize pollution, or have nonpecuniary disutility from holding polluter stock. With nonpecuniary disutility, introducing a green derivative may dramatically alter who invests most in polluters, but has no impact on aggregate pollution.

Suggested Citation

  • Steven D. Baker & Burton Hollifield & Emilio Osambela, 2022. "Asset Prices and Portfolios with Externalities [Pricedetermination in the EU ETS market: theory and econometric analysis with market fundamentals]," Review of Finance, European Finance Association, vol. 26(6), pages 1433-1468.
    • Handle: RePEc:oup:revfin:v:26:y:2022:i:6:p:1433-1468.
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    File URL: http://hdl.handle.net/10.1093/rof/rfac065
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    References listed on IDEAS

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    Cited by:

    1. Lucey, Brian & Ren, Boru, 2023. "Time-varying tail risk connectedness among sustainability-related products and fossil energy investments," Energy Economics, Elsevier, vol. 126(C).
    2. Faccini, Renato & Matin, Rastin & Skiadopoulos, George, 2023. "Dissecting climate risks: Are they reflected in stock prices?," Journal of Banking & Finance, Elsevier, vol. 155(C).
    3. Braun, Alexander & Braun, Julia & Weigert, Florian, 2023. "Extreme weather risk and the cost of equity," CFR Working Papers 23-08, University of Cologne, Centre for Financial Research (CFR).
    4. Konark Saxena & Mandeep Singh, 2024. "Investors reward countries for participating in climate agreements," Nature Communications, Nature, vol. 15(1), pages 1-11, December.

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    More about this item

    Keywords

    Socially responsible investment; ESG; Portfolio theory; Hedging; Externality;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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