The Impact of Climate Change Risk on Long-Term Asset Allocation

Jean-Charles Bertrand, Guillaume Coqueret (), Nicholas Mcloughlin and Stéphane Mesnard
Additional contact information
Jean-Charles Bertrand: HEC Paris - Ecole des Hautes Etudes Commerciales
Guillaume Coqueret: EM - EMLyon Business School

Post-Print from HAL

Abstract: The authors propose a framework for long-term cross-asset portfolio choice in which the estimation of the covariance matrix is subject to climate risk. They model the future volatility and correlation of assets as a linear function of three types of forward-looking variables: the long-term future average, climate-aware projections of economic indicators, and scenarios for the temperature anomaly. They analyze the shifts from a baseline 60/40 equity/bond allocation when taking climate risk into account. The takeaways are the following: 1) these changes are small and mostly favorable to bonds if the focus is on the estimation of risk components; 2) including climate-driven expected returns in the optimization substantially alters the compositions but to the benefit of equities; 3) in all cases, the risk-adjusted returns decrease, often significantly, when taking climate impact into account.

Date: 2024-02-28
References: Add references at CitEc
Citations:

Published in Journal of portfolio management, 2024, 50 (5), 238-263 p. ⟨10.3905/jpm.2024.1.586⟩

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04430743

DOI: 10.3905/jpm.2024.1.586

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().