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Asset Prices and Portfolios with Externalities

Author

Listed:
  • Steven Baker

    (University of Virginia)

  • Burton Hollifield

    (Carnegie Mellon University)

  • Emilio Osambela

    (Board of Governors of the Federal Reserve System)

Abstract

Elementary portfolio theory implies that environmentalists optimally hold more shares of polluting firms than non-environmentalists, and that polluting firms are more highly valued and attract more investment than otherwise identical firms that do not pollute. These results reflect the demand to hedge against states with high pollution, occurring when dirty technology is more heavily and profitably utilized. Pigouvian taxation can reverse the valuation and investment results, but environmentalists will still overweight polluters in their portfolios. We introduce countervailing motives for environmentalists to underweight polluters, comparing the implications when environmentalists coordinate to internalize pollution, or have nonpecuniary disutility from holding polluter stock. With nonpecuniary disutility, introducing a green derivative product may dramatically alter who invests most in polluters, but has no impact on aggregate pollution.

Suggested Citation

  • Steven Baker & Burton Hollifield & Emilio Osambela, 2019. "Asset Prices and Portfolios with Externalities," 2019 Meeting Papers 1255, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:1255
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    References listed on IDEAS

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    Cited by:

    1. Michael Donadelli & Patrick Grüning & Steffen Hitzemann, 2019. "Understanding Macro and Asset Price Dynamics During the Climate Transition," Bank of Lithuania Discussion Paper Series 18, Bank of Lithuania.

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