Dynamic ESG Equilibrium
56 Pages Posted: 5 Oct 2021 Last revised: 12 Nov 2022
Doron Avramov
Interdisciplinary Center (IDC) Herzliyah
Abraham Lioui
EDHEC Business School
Yang Liu
The University of Hong Kong - Faculty of Business and Economics
Andrea Tarelli
Catholic University of Milan
Date Written: October 3, 2021
Abstract
This paper develops and applies an equilibrium model that accounts for ESG demand and supply dynamics. In equilibrium, ESG preference shocks represent a novel risk source characterized by diminishing marginal utility and positive premium. Expected green asset returns are negatively associated with time-varying convenience yield, while positive exposure of unexpected returns to ESG preference shocks imply a positive green premium. Augmenting these conflicting forces with positive contemporaneous effects of preference shocks on realized returns, the green-minus-brown portfolio can deliver large positive payoffs for long horizons. Nonpecuniary benefits from ESG investing account for a nontrivial and increasing fraction of total consumption.
Keywords: ESG, Dynamic equilibrium, Asset pricing, Preference shock
JEL Classification: G12, G19, J71
Suggested Citation: Suggested Citation
Doron Avramov
Interdisciplinary Center (IDC) Herzliyah ( email )
P.O. Box 167
Herzliya, 46150
Israel
HOME PAGE: http://faculty.idc.ac.il/davramov/
Abraham Lioui
EDHEC Business School ( email )
France
Yang Liu
The University of Hong Kong - Faculty of Business and Economics ( email )
Pokfulam Road
Hong Kong
China
Andrea Tarelli (Contact Author)
Catholic University of Milan ( email )
Largo Gemelli, 1
Milan, 20123
Italy
HOME PAGE: http://sites.google.com/view/andreatarelli
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