University of Twente Student Theses
A Framework for Evaluating Market Risks in Equity Portfolios Linked to Biodiversity Decline
El Bou Messaoudi, Ferial (2024) A Framework for Evaluating Market Risks in Equity Portfolios Linked to Biodiversity Decline.
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| Abstract: | In partnership with De Nederlandsche Bank, this study aims to investigate the market risks associ- ated with biodiversity loss in equity portfolios. With rising sea levels, more wildfires, and warmer temperatures, the consequences of losing biodiversity become clearer. Cutting down forests, inva- sive species, and species dying out pose serious threats to both humans and animals. Biodiversity and its ecosystems are important for the economy since almost every economic activity depends on them. Biodiversity and its ecosystems play a crucial role in supporting various sectors of the econ- omy, making it essential to understand and quantify the implications of biodiversity loss for fi- nancial markets. There is a lack of methods in the existing literature to identify the physical and transition risks linked to biodiversity loss and understand how they affect market risk. This study presents a framework for identifying biodiversity risk exposure within an equity portfolio. We follow the traditional Fama-French approach with an extension of biodiversity risk factors. Using the High-Minus-Low portfolio construction method, aligned with the Fama-French approach. This approach constructs the physical and transition biodiversity risk factors, indicating a positive risk premium associated with biodiversity transition risk. Moreover, the framework aims to assess the market risk linked to biodiversity risk. Through biodiversity time series regression, the sensitivity of a globally diversified equity portfolio to biodiversity risk factors is estimated, re- vealing minimal sensitivity. Lastly, potential losses of the equity portfolio, including biodiversity risk, are estimated. The sensitivity analysis indicates a small impact of biodiversity risk factors on market risk within the equity portfolio. This research creates a framework to incorporate biodiver- sity risk into existing market risk models. |
| Item Type: | Essay (Master) |
| Clients: | De Nederlandsche Bank, Amsterdam, The Netherlands |
| Faculty: | BMS: Behavioural, Management and Social Sciences |
| Subject: | 01 general works |
| Programme: | Industrial Engineering and Management MSc (60029) |
| Link to this item: | https://purl.utwente.nl/essays/99779 |
| Export this item as: | BibTeX EndNote HTML Citation Reference Manager |
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