Multivariate risk aversion utility,application to ESG investments |
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| Institution: | 1. School of Management, China Institute for Studies in Energy Policy, Xiamen University, Xiamen 361005, China;2. School of Public Affairs, Zhejiang University, Hangzhou 310058, China;3. Institute for Advanced Studies in Finance and Economics, Hubei University of Economics, Wuhan 430205, China;1. School of Economics and Management, Dongguan University of Technology, No. 251, Xue Yuan Rd., Dongguan, Guangdong, China;2. Department of Finance, College of Management, National Yunlin University of Science and Technology, No. 123, Sec.3, University Rd., Yunlin County, Taiwan;1. Eastern Mediterranean University, North Cyprus, via Mersin 10, Turkey;2. OSTIM Technical University, Ankara, Turkey;3. Institute of Labor Economics (IZA) Bonn, Germany;4. Economic Research Forum (ERF), Cairo, Egypt;6. Gazi University, Ankara, Turkey;7. University of Nebraska-Omaha, USA |
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| Abstract: | This paper uses the concept of multivariate or multi-attributive utility to attach different risk aversion levels to different sources of wealth (e.g. sectors, stocks, asset classes). In this context, we address the topic of environmental, social, and corporate governance (ESG) investments from the perspective of an investor with different risk aversion levels to green and brown stocks. We obtain closed-form solutions for the optimal allocations, value function, and wealth equivalent losses (WEL) from suboptimal choices. The numerical analysis demonstrates the significant increase, of up to 33%, in green investments when accounting for a differential in risk aversions levels, with up to 65% in WEL when using same risk-aversion levels.1 |
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| Keywords: | Multiple risk-aversion levels Multi-attributive utility Optimal control Expected Utility Theory Multivariate utility HJB equation |
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