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Updated: Jun 28, 2025
05:37
An R-Based Landscape Validation of a Competing Risk Model
Published on: September 16, 2022
2.1K
Optimal risk management considering environmental and climatic changes.
Ramzi Benkraiem1, Youssef El-Khatib2, Jun Fan3
1Audencia Business School Nantes, Nantes, France.
Summary
This study introduces a novel Markov-switching model to manage climate risk in investment strategies. Our risk-averse approach enhances portfolio resilience against climate-related economic instability.
Area of Science:
- Environmental economics
- Financial risk management
- Climate change adaptation
Background:
- Climate change poses significant risks to economic stability and policy-making.
- Existing investment strategies often fail to adequately address climate-related environmental risks.
- There is a need for advanced models to integrate climate risk into financial decision-making.
Purpose of the Study:
- To develop and evaluate a novel trading strategy that incorporates climate risk.
- To optimize investment utility using a risk-averse hedging approach.
- To address the limitations of current studies in modeling climate risk impacts.
Main Methods:
- Utilized a Markov-switching model to analyze climate risk.
- Employed backward stochastic differential equations for utility optimization.
- Developed and tested three distinct hedging strategies based on risk aversion.
Main Results:
- The proposed Markov-switching model effectively incorporates exogenous climate events.
- The developed risk-averse strategy significantly outperforms traditional investment approaches.
- Flexible risk trading within the strategy adapts to investor risk aversion driven by climate events.
Conclusions:
- The findings highlight the importance of integrating climate risk into investment strategies.
- The proposed model and strategy offer a pathway to more resilient investment portfolios.
- This research provides valuable insights for climate policy and financial risk management.
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