Paul Ehling is a professor of finance at BI Norwegian Business School in Oslo, Norway. Before joining BI in 2005, he served on the faculty of the Pennsylvania State University. He received a PhD in Finance from HEC Lausanne and FAME in December 2003. Ehling has consulted on corporate risk management, interest rate risk management, risk capital, valuation of derivatives for several corporations and worked for a consultancy firm.
There is strong demand for sustainable investing in direct indexing strategies. We examine implications of disagreement about environmental, social, and governance (ESG) ratings for portfolio choice by maximizing ESG scores subject to a tracking error constraint. Varying the ESG score we optimize on results in portfolios with substantial differences. Correlations between active weights of the ESG-optimized portfolios are even lower than correlations between ESG scores. Optimal portfolios have positive (negative) active weights in stocks with high (low) ESG scores, as expected, but in both cases a small market capitalization or high specific risk pulls the active weight toward zero. To attenuate ESG disagreement, we propose an optimal portfolio that maximizes the average ESG score across vendors and explicitly manages ESG disagreement by penalizing stocks with high ESG uncertainty. Increasing ESG uncertainty aversion thus means investing less in stocks with high ESG disagreement. Our solution is well suited for direct indexing clients wanting to express their sustainability beliefs
Zhanhui, Chen; Ehling, Paul & Xiouros, Costas (2020)
Technology choice allows for substitution of production across states of nature and depends on state-dependent risk aversion. In equilibrium, endogenous technology choice can counter a persistent negative productivity shock with an increase in investment. An increase in risk aversion intensifies transformation across states, which directly leads to higher investment volatility. In our model and the data, the conditional volatility of investment correlates negatively with the price-dividend ratio and predicts excess stock market returns. In addition, the same mechanism generates predictability of consumption growth and produces fluctuations in the risk-free rate
Ehling, Paul; Gallmeyer, Michael, Heyerdahl-Larsen, Christian & Illeditsch, Philipp (2018)
We study portfolio choice with multiple stocks and capital gain taxation assuming that capital losses can only offset current or future realized capital gains. We show, through backtesting using empirical distributions, that optimal equity holdings over an extended period are significantly lower on average than benchmark holdings suggested in the literature. Using Value and Growth or Small and Large portfolios, the backtests show that allocations remain persistently under-diversified. Carry-over losses have large economic significance since they can dramatically shrink the no-trade region. Finally, the backtested economic cost of incorrectly modeling capital losses is at least 8 percent of lifetime wealth.
Ehling, Paul; Graniero, Alessandro & Heyerdahl-Larsen, Christian (2018)
Asset prices and portfolio choice with learning from experience
We study asset prices and portfolio choice with overlapping generations, where the young disregard history to learn from own experience. Disregarding history implies less precise estimates of output growth, which in equilibrium leads the young to increase their investment in risky assets after positive returns, that is, they act as trend chasers. In equilibrium, the risk premium decreases after a positive shock and, therefore, trend chasing young agents lose wealth relative to old agents who behave as contrarians. Consistent with findings from survey data, the average belief about the risk premium in the economy relates negatively to future excess returns and is smoother than the true risk premium.
