Abstract
We study how investor beliefs about the economic impact of climate change affect long-horizon portfolio choice. We show that buy-and-hold investors who elicit prior views from a temperature long-run risks (LRR-T) model allocate less capital to equities at longer horizons. These investors perceive stocks to be riskier over longer holding periods because climate change weakens their beliefs in mean reversion and increases estimation risk and uncertainty about future expected returns. Climate risk also reduces the optimal allocation to equity for long-term investors with LRR-T beliefs who dynamically rebalance their portfolio, because it generates a negative intertemporal hedging demand.
Original language | English |
---|---|
Publisher | Rotterdam School of Management (RSM), EUR |
Number of pages | 71 |
DOIs | |
Publication status | In preparation - 2023 |
Research programs
- RSM F&A