Dreyer, Sharma and Smith (2023) conjecture that investors may feel good about themselves from making socially responsible investments; they may get a “warm glow” from going green. They estimate a model of “warm glow” investment where investors derive utility from the total amount invested in green assets. In this paper we quasi-replicate their paper to estimate an alternative form of warm-glow preferences where people get utility from the share of their wealth invested in green assets. We show that the green preference of investors has become significantly larger since the financial crisis of 2007.

Purpose This paper aims to investigate whether environmental, social and governance (ESG) practices influence stock returns in the US stock market, looking at the period from 2002 to 2020. Design/methodology/approach The authors quasi-replicate two reference articles that found that socially responsible funds used to underperform, but that this underperformance tendency has disappeared in more recent periods. Findings Using US data, the authors show that independent of the ESG database used, portfolios of neutral stocks present consistently higher systematic risk (beta) than ESG portfolios, although this difference decreases over time. This may be due to the significant increase in demand for ESG portfolios in the past decade, and their consequent price inflation and increase in volatility. However, concerning risk-adjusted returns and contrary to the authors’ reference literature, the results are highly dependent on the rating provider used, and neither support underperformance nor indicate a tendency over time. These inconsistent results suggest that the “ESG label” is not a determinant of portfolio performance. Research limitations/implications If ESG ratings are a legitim benchmark for sustainability, then the costs of going sustainable in stock portfolios might be marginal for fund managers. Originality/value Two different ESG-rating agencies, Morgan Stanley Capital International (MSCI) and Thomson Reuters, are used to identify sustainable stocks. Different from the literature, the authors selected stocks for their portfolios stochastically following a uniform probability distribution, thus avoiding fund manager bias.

Economists frequently point out how hard it is for companies to invest in environmentally sustainable solutions and at the same time keep their businesses attractive to investors. In the public and political debate economic subsidies are therefore often seen as essential tools in fostering the green transition. This chapter challenges this notion. We suggest that people may develop tastes for investing in green projects and explore the implications of such preferences for asset-pricing. Then, we discuss whether this taste exists in practice by pointing out research that directly tried to measure it in the United States. Moreover, we show that the existence of such a taste should reduce the cost of capital of green investments. We argue that the development of the preference for environmentally correct projects by the investor should work as a natural and automatic incentive to encourage sustainable projects; this should facilitate green and sustainable transition regardless of the level of governmental subsidies. However, the lack of consistency of ESG methodologies that are used as benchmarks by investors when choosing their green portfolios could create distrust of responsible investors. This could in turn counteract the effects of their green taste on asset-pricing.

In this paper we develop a novel theory to explain why green stocks should underperform relative to conventional stocks. We assume that investors derive utility from investing in green stocks – what we call “warm-glow” investment. We derive the theoretical implications of these preferences in a model that is an extension of the Consumption-based Capital Asset Pricing Model. We estimate the model using the Generalized Method of Moments. Our estimates of the strength of the preference for warm glow before the financial crisis are statistically significant but economically insignificant; our estimates of it after the crisis are significant both statistically and economically.

Calculating the Optimal Hedge Ratio (OHR) is challenging for agricultural exporting countries. The alternatives have been either to rely upon closed -form solutions for the OHR that require unpalatable assumptions (quadratic utility, or CARA utility with Gaussian distributions) or to employ complicated numerical methods. This paper derives an approximate closed -form solution for "compact" distributions with "small" risks. Given empirical distributions of prices and quantities it requires simple calculations to arrive at the OHR for any desired class and calibration of risk preferences. To the extent that futures markets are unbiased, the solution also suggests that a simple minimumvariance calculation may be sufficient to calculate the OHR.

In this paper we study the comparative statics of Nth degree stochastic dominance shifts in a large class of non-cooperative games. We consider symmetric equilibria as well as asymmetric equilibria in which the risk changes are idiosyncratic and not necessarily of the same stochastic order. Furthermore, we establish conditions for risk changes to produce multiplier effects on equilibrium strategies. Finally, we evaluate the comparative statics of stochastic dominance shifts in supermodular games, which may feature multiple equilibria and non-convex strategy sets.

Uniform customer-class pricing can do much of the work of congestion-based or time-of-day pricing in communication or wireless networks. A monopolist exploits differences in the stochastic characteristics of demands. If demands are correlated and the firm faces a capacity constraint, then it can set prices to reduce the variability of aggregate demand, thereby reducing the probability of excess demand and the associated service quality deterioration. Demands that covary negatively with aggregate demand are valuable to the firm in much the same way that securities that covary negatively with the market are valuable in a stock portfolio. Customer classes that exhibit low covariance with aggregate demand realize lower optimal prices. Optimal capacity is also affected by these covariances. As long as demands are not perfectly positively correlated, expected costs of joint production are less than expected costs of serving demands separately.

This paper explores the implications of a novel class of preferences for the behavior of asset prices. Following a suggestion by Marshall (1920), we entertain the possibility that people derive utility not only from consumption, but also from the very act of saving. These "saving-based" preferences are related to models of habit formation and the spirit of capitalism, but incorporate the feature that people have anticipatory habits because they care about the future accumulation of wealth. We derive the Euler equations for these preferences and estimate them with GMM. Our estimates suggest that the preference for saving is economically significant. (C) 2013 Elsevier B.V. All rights reserved.

Abstract How should changes in environmental quality occurring in the future be discounted? To answer this question we consider a model of “ecological discounting”, where the representative consumer has a utility function defined over two attributes, consumption and environmental quality, which evolve stochastically over time. We characterize the determinants of the social discount rate and its behavior over time using a preference structure that disentangles attitudes towards intertemporal inequality, attitudes towards risk, and tastes over consumption and environmental quality. We show that the degree of substitutability between consumption and environmental quality, the degree of risk aversion, the degree of inequality aversion, and the rate at which these attitudes change as natural and man-made resources evolve over time are all important aspects of the ecological discount rate and its term structure. Our analysis suggests that over medium and long term horizons the ecological discount rate should be below the rate of time preference, supporting recent proposals for immediate action towards climate change mitigation.

We analyze how commodity price uncertainty affects saving behavior and welfare in a dynamic model with multiple commodities, portfolio hedging, and a preference structure that disentangles ordinal preferences, attitudes towards risk, and attitudes towards intertemporal substitution. We show that the effect of price uncertainty on savings boils down to knowing (1) hf degree of resistance to intertemporal substitution and (2) the effect that uncertainty has on the certainty-equivalent real interest rate. We also show that, if the certainty-equivalent real interest rate is lower with uncertainty, consumers' welfare is also lower.

We analyze precautionary saving behavior in a framework with labor and nonlabor income risks, an endogenous supply of labor, and a representation of preferences that disentangles attitudes toward risk, attitudes toward intertemporal substitution, and ordinal preferences for consumption and leisure. This preference structure allows us to disentangle and to describe in an intuitive way the different forces that determine precautionary saving "in the small" and "in the large."

This paper develops a theoretical model that identifies the relationship between the volatility of private sector wages and growth. The model suggests two distinct channels in which wage volatility affects growth: a positive direct way and a negative indirect way. The direct effect stems from precautionary savings, whereas the indirect effect works through the mediating role of government size. Our empirical part of applying a 3SLS approach to a panel of 20 high-income OECD countries provides strong evidence for the existence of both effects. Various robustness tests confirm the results. In addition, our data shows that the indirect effect is stronger in smaller countries with a population under 10 million people, whereas the direct effect is more significant in bigger countries.

We analyze how commodity price variability affects saving behavior in a dynamic model with multiple commodities, portfolio hedging, and a preference structure that disentangles attitudes towards risk and attitudes towards intertemporal substitution. We show that the effect of price variability on savings boils down to knowing 1) the consumer’s degree of aversion to intertemporal fluctuations (i.e. the size of the elasticity of intertemporal substitution) and 2) the effect that price variability has on the certainty-equivalent real interest rate. Price variability is more likely to decrease the certainty-equivalent rate if consumers are highly risk averse, if there is limited intra-temporal substitution among the goods, and if asset returns are a poor hedge against inflation. We also show that if price variability decreases the certainty-equivalent rate, consumer’s welfare also decreases.

We analyze the demand for medical care and precautionary saving in a framework with uncertainty surrounding the incidence of illness and the effectiveness of medical treatments and a representation of preferences that disentangles ordinal preferences, risk preferences, and intertemporal smoothing preferences. We consider a pure consumption model with exogenous health capital and a model where young consumers invest in preventive care to increase their future health stock. In both cases, we establish conditions for the different sources for uncertainty to induce precautionary saving and we evaluate how uncertainty affects the demand of curative and preventive care. We also show that given the self-insurance function of preventive care, consumers' welfare may increase with the degree of uncertainty surrounding health care effectiveness.

This study reveals how a Korean monetary transmission mechanism evolves in the tumultuous decade of the 1990s. We show that (i) contractionary monetary policy shocks have more explanatory power for the post‐crisis periods than for the pre‐crisis period; (ii) the effects on output from external shocks attributed to the oil price and the U.S. federal fund rates are mixed; (iii) there is little positive spillover effect from the U.S. to Korea through the trade channel; and (iv) there is a positive spillover effect from the international capital market channel.

Recent research has shown that the “spirit of capitalism”—a preference for wealth itself, in addition to consumption—has important implications for growth and asset pricing. This paper explores how the spirit of capitalism affects saving and consumption behavior. We demonstrate that the spirit of capitalism may reduce the importance of precautionary savings. It can also explain the excess sensitivity puzzle: the spirit of capitalism causes dramatic deviations from a random walk. It may also offer a partial explanation of the excess smoothness puzzle.

In a recent paper [Luo. Smith, and Zou (2009)] we showed that the spirit of capitalism could in theory resolve the two fundamental anomalies of modern consumption theory, excess sensitivity and excess smoothness However, that basic model could not plausibly explain the empirical magnitude of excess smoothness In this paper we develop two extensions of the model - one with transitory and permanent shocks to Income, the other with a stochastic interest rate - that where the spirit of capitalism can explain excess smoothness

This paper considers the canonical stochastic growth model with CRRA utility and Cobb-Douglas technology. It obtains a closed-form solution for the case where capital's share is equal to the reciprocal of the intertemporal elasticity of substitution. This provides a useful benchmark that illuminates the transmission mechanism under uncertainty. In particular, it highlights the complicated ways in which risk and nonlinearities interact, via Jensen's inequality, to affect the steady state capital stock.

Hyperbolic discounting is not observationally equivalent to exponential discounting. It is always possible to calibrate an exponential model so that it predicts the same level of consumption as a hyperbolic model. However, the two models have radically different comparative statics.

Multiplicative habit introduces an additional consumption risk as a determinant of the equity premium, and allows time preference and habit strength, in addition to risk aversion, to affect “the price of risk.” A model combining multiplicative habit and power-expo preferences cannot be rejected.