Institutional Investors

Revealed Preference for Green Stocks: An Asset Demand Approach (Job Market Paper)

Winner of the Best Student Paper Award at the 33rd Annual Meeting of the Midwest Econometrics Group, 2023 This paper combines a traditional portfolio construction problem with demand estimation techniques to estimate the demand for green stocks of US institutional investors. The methodology presented innovates along two dimensions with respect to recent influential work on asset demand estimation. First, in our framework investors have heterogeneous portfolios not only through differential beliefs about future returns, but also because they place varying importance on the non-financial characteristics of the portfolios they construct. Second, by using a mixed logit demand specification, we can estimate asset demand that delivers more realistic substitution patterns across assets. Using data on the environmental performance of firms and quarterly stock holdings data from institutional investors, we estimate the demand for stocks accounting for environmental scores and return-related stock characteristics. We find that taste for green stocks fluctuates over time and by investor's assets under management. In a counterfactual exercise we study the equity price effects of a ban on green investing for pension funds; we find that a portfolio with the top brown stocks is estimated to have capital gains of 5.9% due to the policy, while a portfolio with the top green stocks is estimated to have capital losses of 7.3%.