Multivariate risk aversion utility, application to ESG investments

Marcos Escobar-Anel
Authors registered in the RePEc Author Service: Marcos Escobar Anel ()

The North American Journal of Economics and Finance, 2022, vol. 63, issue C

Abstract: This paper uses the concept of multivariate or multi-attributive utility to attach different risk aversion levels to different sources of wealth (e.g. sectors, stocks, asset classes). In this context, we address the topic of environmental, social, and corporate governance (ESG) investments from the perspective of an investor with different risk aversion levels to green and brown stocks. We obtain closed-form solutions for the optimal allocations, value function, and wealth equivalent losses (WEL) from suboptimal choices. The numerical analysis demonstrates the significant increase, of up to 33%, in green investments when accounting for a differential in risk aversions levels, with up to 65% in WEL when using same risk-aversion levels.11We deeply thank anonymous reviewers and journal’s leadership for very interesting suggestions on relevant papers, keywords, and ideas that have enriched this work.

Keywords: Multiple risk-aversion levels; Multi-attributive utility; Optimal control; Expected Utility Theory; Multivariate utility; HJB equation (search for similar items in EconPapers)
JEL-codes: C61 Q56 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:63:y:2022:i:c:s1062940822001280

DOI: 10.1016/j.najef.2022.101790

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