Price of climate risk hedging under uncertainty

Alexey Rubtsov, Wei Xu, Aleksandar Šević and Željko Šević

Technological Forecasting and Social Change, 2021, vol. 165, issue C

Abstract: In this manuscript, we examine the welfare benefits of climate risk hedges and the effects of climate uncertainty on optimal portfolios with different investment horizons. We consider the case when an investor who trades in a stock market also holds a claim that pays off when an adverse climate scenario materializes. The optimal investment strategy, the price of the claim, and the cost of climate change uncertainty are derived. It is shown that climate uncertainty reduces stock investment. Furthermore, an increase in climate uncertainty decreases investor’s welfare, even when climate risk hedging instruments are available.

Keywords: Climate change; Robust portfolio choice; Hedging strategies; Pricing illiquid claims; Model uncertainty (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:tefoso:v:165:y:2021:i:c:s0040162520312567

DOI: 10.1016/j.techfore.2020.120430

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