Title: Portfolio under-diversification: Equity sector bias
Authors: Ibrahim Tahri - PIK (Potsdam Institute for Climate Impact Research) (Germany) [presenting]
Abstract: A potential motive behind investors' preference for holding fossil fuel (FF) assets relative to clean energy (RE) assets might stem from an asymmetry of information vis-a-vis potential payoffs of RE sectors compared those of the FF sectors or/and simply an underestimation of the risks of carbon assets depreciation. This suggests there might exist a bias in the portfolio choice of the investor. An underdiversified portfolio can be rationalized through a combined learning-investment model. A key characteristic in this type of models is the role of endogenous information choice in creating bias, where thanks to some general equilibrium forces there are increasing returns to information, which in turn leads to full specialization in learning and influences the optimal asset allocations of the investor. We attempt to provide a theoretical support to describe the potential presence of sector equity bias, similar to the home equity bias puzzle, in the energy sector. For this purpose, we rely on a new strand of literature which combines information theory to portfolio choice theory that has been used to explain the portfolio bias.