Low carbon transition risk in mutual fund portfolios: Managerial involvement and performance effects

Reboredo, Juan C.; González, Luis Arias

doi:10.1002/bse.2928

Cited by 12 publications

(5 citation statements)

References 70 publications

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“…However, in the absence of price shifts, SNP is flexible enough to represent electricity returns. In any case, this is only an improvement; under the low carbon transition, it should be complemented with many other risk management practices 51 …”

Section: Resultsmentioning

confidence: 99%

“…In any case, this is only an improvement; under the low carbon transition, it should be complemented with many other risk management practices. 51 On the other hand, this model also benefits electricity generation and planning. Management of spot price risks and electricity generation are interrelated decisions to satisfy the demand and provide efficient spot (and forward) pricing.…”

Section: Applications and Limitationsmentioning

confidence: 99%

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The impact of the El Niño phenomenon on electricity prices in hydrologic‐based production systems: A switching regime semi‐nonparametric approach

Trespalacios¹,

Cortés

Perote

2023

Energy Science & Engineering

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Electricity production in highly hydrological-dependent systems is determined by different weather phenomena, which strongly impact spot prices. To account for such stylized facts, we propose a stochastic process with a mean reversion and switching regime component to represent the dynamics of the spot price. The short-term movements are represented by semi-nonparametric (SNP) distributions, in contrast to previous studies that traditionally assume Gaussian processes. We consider the Colombian electricity market as a study case, in which 68% of its electrical generation comes from water resources, and the El Niño phenomenon represents a critical source of risk for maintaining long-term supply, sustainability of investments, and efficiency of prices. We show that under scarcity seasons, the spot price mean, variance, and some superior-order moments of electricity price distribution increase, as does the risk level of the system. In particular, the switching regime model with SNP distributions for the random components outperforms traditional models, leading to accurate estimates and simulations, thus being a helpful tool for resource planning, risk management, and policy-makers for electricity markets with high climatic dependency. K E Y W O R D Selectricity markets, Gram-Charlier series, risk management, switching regime | INTRODUCTIONElectricity is involved in most industrial processes and daily human activities worldwide. 1,2 The current commitments that governments, companies, and individuals are making in terms of sustainability are related, to a large extent, to the way primary, renewable, and nonrenewable sources of energy are exploited for conversion or substitution, 3,4 where the implications for going green could imply superior investments. 5 The spot market, forward contract, and futures contract are the most common mechanisms to define the quantities and prices of transactions between sellers and buyers. 6,7 The interplay of these conditions results in a series of prices with certain dynamics different from those of other primary commodities or financial markets. 8,9 According to Benth et al., 10 electricity price exhibit seasonality in several, mean reversion, jumps, and heavy

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Section: Resultsmentioning

confidence: 99%

Section: Applications and Limitationsmentioning

confidence: 99%

The impact of the El Niño phenomenon on electricity prices in hydrologic‐based production systems: A switching regime semi‐nonparametric approach

Trespalacios¹,

Cortés

Perote

2023

Energy Science & Engineering

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“…In this latter respect, investors seem to assume that high‐carbon investments carry less systemic risk than low‐carbon investments (Vioto et al., 2022). Given the inefficient pricing of transition risks in financial and credit markets, investors may thus underestimate the systemic risk of some institutions exposed to transition tail risks (Reboredo & Otero González, 2021).…”

Section: Financiers and Transition Risksmentioning

confidence: 99%

Financial stability, stranded assets and the low‐carbon transition – A critical review of the theoretical and applied literatures

Daumas

2023

Journal of Economic Surveys

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Transitioning to a low‐carbon economy will entail sweeping transformations of energy and economic systems. A growing research body has raised concerns about the effect of such strain on financial stability. This literature on “financial transition risk” has highlighted that the conjunction of climate policy, technological change and shifts in consumption patterns may propagate to financial markets. In extreme cases, these dynamics may result in a “Climate‐Minsky” moment with systemic implications. The field has developed quickly, covering many methods and research questions. While this expansion in literature is advantageous when studying a complex issue like the low‐carbon transition, it also comes with downsides. The large number of methods hampers result comparison, and the integration of research designs. It also makes it difficult to provide a synthetic view of results in the literature as well as identify remaining uncertainties. To bridge these gaps, I propose a critical review of the literature. I examine three sub‐fields: the asset stranding literature, the direct assessment of transition risks through prospective models and the financial empirics of the low‐carbon transition. I expound their main results, critically assess underlying methodologies and propose a framework to compare results. The review ends by suggesting some avenues for future research.

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“…It is important to consider a downside risk as low-carbon risk assets could be more sensitive to tail risks (Reboredo et al, 2022). The ES is a coherent measure of downside risk.…”

Section: Highmentioning

confidence: 99%

The effect of climate disclosure on stock market performance: Evidence from Norway

Antoniuk

2022

Sustainable Development

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Increased concerns about climate change and its economic impact emphasize the necessity of sustainable investment and have become a demanded research topic.Via voluntary carbon and climate-related disclosure, companies indicate their exposure to climate change risks and how they counteract them. Investors seeking to reduce the climate risk of their portfolios can utilize this information. Using the 2010-2020 Carbon Disclosure Project scoring for companies in Norway, I formed portfolios of stocks with high, low, and no scores. These portfolios represent lower, higher, and unknown climate risks, respectively. The results suggest that a valueweighted portfolio of firms with high scores generates an extra 1.3% annualized return over the market. This portfolio steadily outperformed the market in recent years based on the information and Sortino ratios. However, after controlling for recognized risk factors, the high-score portfolio has no abnormal return unless energy stocks are excluded. In contrast, low-and no-score portfolios were penalized for bearing higher climate risk so that there is a significant climate alpha after 2016. This research highlights that a climate-aligned investment strategy is profitable while offering lower climate change risk exposure.

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Low carbon transition risk in mutual fund portfolios: Managerial involvement and performance effects

Cited by 12 publications

References 70 publications

The impact of the El Niño phenomenon on electricity prices in hydrologic‐based production systems: A switching regime semi‐nonparametric approach

The impact of the El Niño phenomenon on electricity prices in hydrologic‐based production systems: A switching regime semi‐nonparametric approach

Financial stability, stranded assets and the low‐carbon transition – A critical review of the theoretical and applied literatures

The effect of climate disclosure on stock market performance: Evidence from Norway

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