Investors’ Adaptation to Climate Change: A Temporal Portfolio Choice Model With Diminishing Climate Duration Hazard
In Business and Policy Solutions to Climate Change, T. Walker et al. (eds.), Palgrave Studies in Sustainable Business In Association with Future Earth, Palgrave Macmillan, 2022. https://doi.org/10.1007/978-3-030-86803-1_11
23 Pages Posted: 11 Apr 2022
Date Written: January 1, 2022
This chapter proposes a portfolio choice model that describes investors’ adaptation to climate change as a temporal process, in which investors’ perception of climate hazards shapes their preferences and decisions over the duration of their financial portfolios. Investors tend to revise, rebalance, or even exit the market in the short run amid a major climate event due to the perception that climate hazard is increasing over time. Moreover, investors who believe that climate hazards are rising over time tend to be skeptical about investments in clean energy and/or mitigation or adaptation projects. The analytical result of the model shows that long-term duration strategy with diminishing climate hazard is more rewarding. Thus, investment strategies and financial policies that focus on reversing this behavior are essential in ensuring successful climate adaptation and stability in financial markets.
Keywords: Modern portfolio theory, portfolio duration, duration hazard, climate adaptation, preference reversal
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