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Green asset pricing

Author

Listed:
  • Benmir, Ghassane
  • Jaccard, Ivan
  • Vermandel, Gauthier

Abstract

This paper demonstrates that empirically grounding the discount factor significantly influences the determination of the carbon price. Using two complementary nonlinear statistical approaches, we assess which utility formulations and corresponding stochastic discount factors best align with U.S. data. We provide evidence that habit formation is essential for capturing the time variation in the stochastic discount factor necessary to match the data. This increased time variation raises the carbon price by 32% and makes it five times more procyclical compared to standard models. The heightened procyclicality reduces aggregate risk, the risk premium, and the need for precautionary savings. JEL Classification: Q58, G12, E32

Suggested Citation

  • Benmir, Ghassane & Jaccard, Ivan & Vermandel, Gauthier, 2020. "Green asset pricing," Working Paper Series 2477, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20202477
    Note: 737337
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    Cited by:

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    2. Kim, Kyounghun & Yang, Eunsun & Choi, Yoonseok, 2024. "Heterogeneous effects of carbon tax, subsidy and foreign carbon emissions on low- and high-carbon firms," Economic Analysis and Policy, Elsevier, vol. 83(C), pages 260-279.
    3. Lodge, David & Pérez, Javier J. & Albrizio, Silvia & Everett, Mary & De Bandt, Olivier & Georgiadis, Georgios & Ca' Zorzi, Michele & Lastauskas, Povilas & Carluccio, Juan & Parraga Rodriguez, Susana &, 2021. "The implications of globalisation for the ECB monetary policy strategy," Occasional Paper Series 263, European Central Bank.
    4. Boneva, Lena & Ferrucci, Gianluigi & Mongelli, Francesco Paolo, 2021. "To be or not to be “green”: how can monetary policy react to climate change?," Occasional Paper Series 285, European Central Bank.

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    More about this item

    Keywords

    climate change; equity premium puzzle; optimal policy; stochastic discount factor;
    All these keywords.

    JEL classification:

    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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