Energy Transition, Asset Price Fluctuations, and Dynamic Portfolio Decisions
24 Pages Posted: 10 Nov 2020
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Energy Transition, Asset Price Fluctuations, and Dynamic Portfolio Decisions
Energy Transition, Asset Price Fluctuations, and Dynamic Portfolio Decisions
Energy Transition, Asset Price Fluctuations, and Dynamic Portfolio Decisions
Date Written: September 21, 2020
Abstract
This paper analyzes the implications of short-termism on portfolio decisions of investors, and its potential consequences on green investments. We study a dynamic portfolio choice problem that contains two assets, one asset with fluctuating returns and another asset with a constant risk-free return. Fluctuating returns can arise from fossil or from clean energy-related assets. Short-termism is seen to be driven by discount rates (exponential and hyperbolic) and the decision horizon of investors. We also explore the impact of the fluctuating assets returns on the fate of the portfolio, for both a deterministic and stochastic model variant, and in cases where innovation efforts are spent for fossil fuel or clean energy sources. Detailing dynamic portfolio decisions in such a way may allow us for better pathways to empirical tests.
Keywords: Short-termism, Decision horizon, Hyperbolic discounting
JEL Classification: E47, G11
Suggested Citation: Suggested Citation