Empirical modelling of environmental risks

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The insurance industry has shown greater interest than the banking sector in incorporating environmental risk assessments into financial analysis, largely due to the negative impacts of natural events on its financial stability. With stricter environmental regulations, credit and investment banks are increasingly focusing on the risks and opportunities associated with environmental factors. This doctoral thesis analyzes the return distribution of various environmentally sensitive securities from the chemical, oil, and alternative energy sectors, alongside the Dow Jones Sustainability Index, to evaluate the financial impact of environment-induced risks. Key areas of focus include modeling the statistical characteristics of these assets using stable distributions, examining environmental risk dynamics through ARMA-GARCH models, identifying the systematic or unsystematic nature of these risks, and assessing the risk-return structure of environmentally sound funds at the portfolio level. Findings indicate that the risk profile of polluting firms is significantly leptokurtic compared to firms with better environmental performance, complicating diversification efforts. For environmental asset management, screening based on stable distributions provides a more realistic risk-return framework, leading to improved financial outcomes.