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How important is green awareness in energy investment decisions? An environmentally-based rebalancing portfolio study

Carlos Esparcia, Antonio Diaz and Daniel Alonso

Energy Economics, 2023, vol. 128, issue C

Abstract: This paper empirically studies the financial performance of energy asset allocation strategies under green and brown preferences. We assume that green investors and traditional or brown energy investors behave differently in their investment decisions. Thus, our optimal portfolio choice is developed in several steps for each energy investor profile and for each monthly rebalancing period. First, energy companies are screened based on Environmental (E) rating quartiles. We construct two categories formed via those companies rated above the first quartile, Q1, and below the third quartile, Q4. Second, for each category, a dynamic minimum variance (MV) problem is optimized based on univariate and multivariate GARCH models. Then, we assess the performance of the whole investment strategies posed. This paper contributes to the financial literature by providing evidence that not only does green investment help reduce the carbon footprint, but also that there is a risk-return spread between green and brown energy investment, adding value for the environmentally concerned investor.

Keywords: Energy sector; Sustainability; Environmental ratings; Portfolio choice; Quartiles; ADCC GARCH (search for similar items in EconPapers)
JEL-codes: G11 G17 G41 Q56 (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:128:y:2023:i:c:s0140988323006722

DOI: 10.1016/j.eneco.2023.107174

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Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

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