A FINANCIAL ENGINEERING PRACTITIONERS SEMINAR SERIES
Event Information
Description
A FINANCIAL APPROACH TO ENVIRONMENTAL RISK
Robert Engle
With
Bryan Kelly, Johannes Stroebel
Climate risk is potentially enormously serious and some believe it threatens the entire human race. When faced with big long term risks it is natural to insure against them. In this case, there cannot be such insurance because the risk is non-diversifiable and consequently no firm can provide this insurance. The finance alternative is to allocate a portion of the investment portfolio to assets that will do especially well in the bad climate state of nature.
Publicly available hedge portfolios are examined on V-LAB to measure the cost of insurance.
This project aims to develop a dynamic approach to hedge climate change through Merton style hedge portfolios. When there is news that climate risk is growing, assets in this portfolio should increase in value. A careful analysis of climate news is used to calibrate this portfolio. A portfolio that hedges climate change news will then be constructed by holding stocks that are correlated with the news. This portfolio is parameterized by environmental characteristics of firms using the method of Kelly and Pruitt.
Robert Engle, the Michael Armellino Professor of Finance at New York University Stern School of Business, was awarded the 2003 Nobel Prize in Economics for his research on the concept of autoregressive conditional heteroskedasticity (ARCH). Professor Engle is the Director of the NYU Stern Volatility Institute and a co-founding president of the Society for Financial Econometrics (SoFiE), a global non-profit organization housed at NYU. Before joining NYU Stern in 2000, he was Chancellor's Associates Professor and Economics Department Chair at the University of California, San Diego and Associate Professor of Economics at MIT. He is a member of the National Academy of Science.
He received his Bachelor of Science from Williams College and his MS in Physics and PhD in Economics from Cornell University. He grew up in Media, Pennsylvania, spent 25 years in San Diego and now lives in New York City.
