Essays in finance: Sustainability in credit risk, carbon risk and portfolio theory

Abstract

In the ongoing and aggravating global climate crisis, the effects of ecological disruption on firms, investors, and society as a whole are being increasingly investigated in the literature. Physical risks, such as increasing average temperatures or rising sea levels, are believed to be the top climate-related risk factor for investors over a time horizon of 30 years and motivate the currently increasing demand for green assets. However, the empirical literature is divided on how green assets perform in comparison to non-green assets, and whether the firm performance is influenced by corporate social performance. Furthermore, the impact of implemented measures for greenhouse gas emission reduction on financial markets remains ambiguous. The underlying thesis covers these aspects and contributes to the growing strain of literature on sustainable finance. The first chapter investigates the relationship between ESG ratings and the probability of corporate credit default, while the second chapter focuses on volatility spillover effects between carbon emission allowance future prices and European stock market sector indices. The last chapter contributes to the understanding of how investors value sustainability under the classical expected utility theory using varying levels of risk aversion.