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Sustainable risk preferences on asset allocation: a higher order optimal portfolio study

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  • Díaz, Antonio
  • Escribano, Ana
  • Esparcia, Carlos

Abstract

This paper empirically investigates the financial performance of asset allocation strategies under “sustainable” risk preferences and conventional risk preferences. We assume that traditional investors and ESG investors behave differently in their investment decisions. The optimal portfolio choice is developed including dynamic higher order conditional co-moments and time-varying risk aversion. From an out-of-sample empirical experiment, we observe that this optimization technique provides much more stable optimal weights for the sustainable portfolio than for the traditional one. Based on both classical and downside-risk performance measures, active management in both portfolios outperforms the global market index. In this context, the non-inclusion of skewness and kurtosis leads to an underestimation of actual risk exposure. Finally, we provide empirical evidence that the sustainable portfolio largely outperformances the traditional investment.

Suggested Citation

  • Díaz, Antonio & Escribano, Ana & Esparcia, Carlos, 2024. "Sustainable risk preferences on asset allocation: a higher order optimal portfolio study," Journal of Behavioral and Experimental Finance, Elsevier, vol. 41(C).
    • Handle: RePEc:eee:beexfi:v:41:y:2024:i:c:s2214635024000029
    DOI: 10.1016/j.jbef.2024.100887
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    Keywords

    Risk aversion; Utility function; Sustainability; Portfolio choice; 4th order moments;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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