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Please note that all times are shown in the time zone of the conference. The current conference time is: 8th June 2024, 03:28:06am EDT
Session Chair: Lorenzo Garlappi, UBC Discussant: Jules Van Binsbergen, Wharton
Location:Room 1203
Presentations
Responsible Consumption, Demand Elasticity, and the Green Premium
Xuhui Chen, Lorenzo Garlappi, Ali Lazrak
UBC
We study equilibrium asset prices in a model where investors favor ``green'' over ``brown'' goods. We show that demand elasticity of goods crucially affects \emph{assets}' riskiness. When demand elasticity is high, brown assets are safer than green, because they hedge against consumption risk. The opposite holds when goods' demand elasticity is low. Our model therefore predicts that the ``green minus brown'' stock return spread (green premium) varies in the cross section and increases in the price elasticity of demand. We test this novel prediction on US stocks and find that over the 2012--2022 period the annual green premium is 11.7\% for firms with high demand elasticity, while it is much smaller and insignificant for firms with low demand elasticity. The high green premium for high-demand elasticity firms is robust to standard risk adjustments and to alternative measures of demand elasticity; it cannot be explained by unanticipated shocks to investors' environmental concerns, and remains strong after using option-implied measures of expected returns. These findings underscore the critical role of goods' demand elasticity for understanding the impact of responsible consumption on asset prices.