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Climate Change and Environmental Risks


A Financial Approach to Environmental Risk


There is increasing public pressure on governments to commit to credible plans to reduce greenhouse gas emissions through carbon taxes, cap and trade or other regulatory systems. The responses of governments to climate change will have large impacts on the economy and on the profitability of key industries. Consequently, the financial sector has an interest in encouraging the adoption of the most cost effective policies in order to minimize any negative impacts on economic growth.

This research exploits recent advancements in stochastic optimization, namely in multi-period Mean Variance (M-V) portfolio allocation theory, to develop a robust method to determine an investment strategy (climate change mitigation) to achieve a targeted level of real GDP per capita at a future specified time, at minimum risk. By using a GDP target, this method avoids having to choose an arbitrary discount rate and reflects the desired to leave future generations a reasonable standard of living. An efficient frontier showing various possible target levels for real GDP per capital and their associated risk will be produced, providing a clear illustration of the risk-return trade-off for climate change policies.




University: New York University
Project Lead: Robert Engle

publications and links



Lead Researcher

Lead Researcher

Robert Engle

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.