A1407
Title: Sustainable investment under inflation and interest rate risks
Authors: Ibrahim Tahri - International Institute for Applied Systems Analysis (IIASA) (Austria) [presenting]
Abstract: The aim is to study an optimal investment problem, in the presence of stochastic inflation and interest rates. This is of particular interest, given the current context of rising inflation. Over an extended period of time, there could be significant changes in the interest rate and inflation rate; hence, uncertainty about these rates may have significant impacts on investment decisions, in particular, towards environmental or climate-friendly investments (due to their long-term nature). The agents' investment opportunity set consists of four instruments; a saving account, two stocks (one general and one green), and a green bond. The investment decisions are made so as to maximize an expected power utility on terminal wealth. We consider two specific cases; one with a nominal green bond and the other case when the green bond is inflation-indexed (IIB). The purpose is to portray the importance of IIBs in hedging inflation risk. The theoretical model is estimated using current market data, in order to construct the optimal investment strategy for an actual real market situation.
