Dynamic ESG Equilibrium
Open accessAbstract
This paper proposes a conditional asset pricing model that integrates ESG demand and supply dynamics. Shocks in the demand for sustainable investing represent a novel risk source, characterized by diminishing marginal utility and positive premium. Green assets exhibit positive exposure to ESG demand shocks, hence commanding higher premia. Conversely, time-varying convenience yield leads to lower expected returns for green assets. Moreover, ESG demand shocks have positive contemporaneous effects on unexpected returns, contributing to large positive payoffs in the green-minus-brown portfolio over extended horizons. The model predictions align closely with evidence on return spreads between green and brown assets, further reinforcing the apparent gap between realized and expected spreads.
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As demonstrated in Avramov, Lioui et al. (2021), brown-averse agents' willingness to sacrifice expected returns when holding green assets can vary with ESG demand and supply.
“As demonstrated in Avramov, Lioui et al. (2021), the brown-averse agents' willingness to sacrifice expected returns when holding green assets can vary with ESG demand and supply.”
From A review on ESG investing: Investors' expectations, beliefs and perceptions (2024) · cites this paper as Avramov, Lioui et al. (2021)
Cites
Sustainable investing in equilibrium
Pástor, Ľ., Stambaugh, R. F., & Taylor, L. A. (2021) · Journal of Financial Economics · doi:10.1016/j.jfineco.2020.12.011 · Cited by 2,226 · see citing works
Climate Change Concerns and the Performance of Green vs. Brown Stocks
Ardia, D., Bluteau, K., Boudt, K., & Inghelbrecht, K. (2023) · Management Science · doi:10.1287/mnsc.2022.4636 · Cited by 639 · see citing works
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A review on ESG investing: Investors' expectations, beliefs and perceptions
Kräussl, R., Oladiran, T., & Stefanova, D. (2024) · Journal of Economic Surveys · doi:10.1111/joes.12599 · Cited by 175 · see citing works
ESG stock markets and clean energy prices prediction: Insights from advanced machine learning
Ghallabi, F., Souissi, B., Du, A., & Ali, S. (2024) · International Review of Financial Analysis · doi:10.1016/j.irfa.2024.103889 · Cited by 54 · see citing works
Retail investor trading and ESG pricing in China
Liu, X., & Wan, D. (2023) · Research in International Business and Finance · doi:10.1016/j.ribaf.2023.101911 · Cited by 43 · see citing works
When do investors go green? Evidence from a time-varying asset-pricing model
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ESG Investing in Good and Bad Times: An International Study
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Sustainable Crowdfunding and Cultural Contexts: Evidence from a Longitudinal Multi-Country Analysis
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A comparative and conceptual intellectual study of environmental topic in economic and finance
Yan, M., Li, Y., Pantelous, A. A., Vigne, S. A., & Zhang, D. (2023) · International Review of Financial Analysis · doi:10.1016/j.irfa.2023.103023 · Cited by 18 · see citing works
“Avramov et al. (2021) apply an equilibrium model accounting for ESG demand and supply dynamics.”
MethodESG scores, scandal probability, and event returns
Sun, W., Luo, Y.-C., Yiu, S.-M., Yu, L., & Ding, W. (2024) · Financial Innovation · doi:10.1186/s40854-024-00635-1 · Cited by 15 · see citing works
“1 Avramov et al. (2021) theoretically inferred that a green-minus-brown portfolio can generate significantly positive payoffs over a reasonably long investment horizon.”
BackgroundThe impact of digitalization capabilities on ESG performance – A European study
Assidi, S., Festa, G., Fait, M., Costanzo, B. C., & Rossi, M. (2026) · The International Entrepreneurship and Management Journal · doi:10.1007/s11365-026-01168-y · Cited by 5 · see citing works
“In this study, we have concentrated on ESG data that is observable in terms of value (Avramov et al., 2025; de Souza Barbosa et al., 2024; Lioui & Tarelli, 2022; Mansouri & Momtaz, 2022).”
Park, M. (2025) · Syst. · doi:10.3390/systems13090783 · Cited by 5 · see citing works
The performance of ESG portfolios: A stochastic dominance approach
Zhou, Z., Wang, S.-L., & Wang, H. (2025) · Finance Research Letters · doi:10.1016/j.frl.2024.106601 · Cited by 5 · see citing works
Green Investors and Green Transition Efforts: Talk the Talk or Walk the Walk?Preprint
Chen, S. (2022) · SSRN Electronic Journal · doi:10.2139/ssrn.4254894 · Cited by 11 · see citing works
Rauf, F. (2026) · Sustainable Development · doi:10.1002/sd.71107 · Cited by 3 · see citing works
Do carbon emissions affect the cost of capital? Primary versus secondary corporate bond markets
Kim, D., & Pouget, S. (2025) · Journal of Corporate Finance · doi:10.1016/j.jcorpfin.2025.102932 · Cited by 1 · see citing works
Responsible investing: a multi-period portfolio selection model
Jin, C.-N., Wu, W.-P., & Xie, J. (2025) · Expert systems with applications · doi:10.1016/j.eswa.2025.128343 · Cited by 3 · see citing works
ESG risk and returns implied by demand-based asset pricing models
Zhang, C., Li, X., Tamoni, A., van Beek, M., & Ang, A. (2024) · Journal of Asset Management · doi:10.1057/s41260-024-00354-3 · Cited by 3 · see citing works
“14 As Avramov et al. (2021) and Pastor et al. (2021, 2022) comment, this is the realized return one observes when there are changes in ESG preferences, AUM, or manager catering ESG effects.”
ESG ratings and attention: The impact on stock market performance
Yan, J., Shen, J.-H., Zou, J., & Zou, Y.-C. (2025) · Finance Research Letters · doi:10.1016/j.frl.2025.107541 · Cited by 3 · see citing works
Active fund management when ESG matters
Avramov, D., Cheng, S., & Tarelli, A. (2025) · Journal of Banking & Finance · doi:10.1016/j.jbankfin.2025.107597 · Cited by 8 · see citing works
Self-citationFrom Reporting to Reality: Measuring ESG-Aligned Sustainable Behaviors in Thai Textile Communities
Singhasenee, N., & Na-nan, K. (2025) · Environmental Challenges · doi:10.1016/j.envc.2025.101324 · Cited by 2 · see citing works
Parent-subsidiary dispersion and ESG rating disparities: evidence from China
Li, B., Xu, X.-Z., Qin, B., & Yang, X. (2025) · Accounting and Business Research · doi:10.1080/00014788.2025.2518082 · Cited by 2 · see citing works
ESG asset demand with information costs
Luciano, E., & Tolomeo, A. (2025) · Annals of Finance · doi:10.1007/s10436-025-00462-z · Cited by 2 · see citing works
“More recent equilibrium theory shows that it is possible to reconcile ex ante and post behavior of returns, even in the short run (see Avramov et al. 2024).”
ESG-integration investment strategy for TDFs with a multi-objective dynamic programming
Liu, W., Dong, Z., Xu, F., & Jing, K. (2025) · International Review of Financial Analysis · doi:10.1016/j.irfa.2025.104262 · Cited by 2
Exploring the Relationship between Information Priming and Sustainable Investment Decisions
Faradynawati, I. A. A., Söderberg, I.-L., & Wester, M. (2026) · Financial planning research journal · doi:10.2478/fprj-2026-0012 · Cited by 1 · see citing works
The price of going green: Multi-objective optimization in the energy equity space
Platania, F., Hernandez, C. T., Ouadghiri, I. E., & Peillex, J. (2026) · Energy Economics · doi:10.1016/j.eneco.2026.109302 · Cited by 1 · see citing works
Why do mutual funds hold ESG? Evidence from China
Zhang, P., Wang, Z., & Sha, Y.-Z. (2026) · Pacific-Basin Finance Journal · doi:10.1016/j.pacfin.2026.103110 · Cited by 1 · see citing works
Do ESG rating changes matter? Evidence from Chinese stock market
Liu, D., & Zhou, J. (2025) · Global Finance Journal · doi:10.1016/j.gfj.2025.101180 · Cited by 1 · see citing works
Changes in the Relation Between ESG and Expected Returns According to ESG Awareness Levels
Lee, E. J., & Lee, Y. K. (2023) · Korean Journal of Financial Studies · doi:10.26845/kjfs.2023.10.52.5.641 · Cited by 1 · see citing works
“또한, 일부 연구에서는 ESG가 좋은 기업과 나쁜 기업들의 성과 차이가 없다고 주장한다(Bauer, Koedijk, and Otten, 2005; Halbritter and Dorfleitner, 2015; Hartzmark and Sussman, 2019; Naffa and Fain, 2022; Aswani et al., 2022).”
ESG, mood and expected stock returns
Bradrania, R., & Dandarvanchig, B. (2026) · Journal of Behavioral and Experimental Finance · doi:10.1016/j.jbef.2026.101272
ESG portfolio performance across risk tiers and market conditions: New evidence from China
Zhu, Z.-Z., Liu, Y., Li, Y., & Chan, K. C. (2026) · International Review of Economics & Finance · doi:10.1016/j.iref.2026.105538
Self-citationFavoring One, Neglecting Another: How ESG Imbalance Shapes Corporate Risk‐Taking
Shen, P., Qing, L., Ye, D., & Wang, C. (2026) · Business Ethics the Environment & Responsibility · doi:10.1111/beer.70144
Chu, L., Tu, J., Zhang, B., Zhang, R., & Zhou, G. (2020) · Management Science · doi:10.1287/mnsc.2024.07169 · Cited by 4 · see citing works
Yi, Y.-X. (2026) · Exploring Science Academic Conference Series · doi:10.70267/icbms.2601.328335
A novel dynamic deep ensemble learning approach for ESG portfolio selection
Wu, W.-P., Lin, Y., Jin, C.-N., & Pang, S. (2026) · Pattern Recognition · doi:10.1016/j.patcog.2026.113943
Chen, S.-P., & Liu, Y.-C. (2026) · Business Strategy and the Environment · doi:10.1002/bse.70842
Self-citationKumari, V., & AlDaas, M. (2026) · The Journal of Economic Asymmetries · doi:10.1016/j.jeca.2026.e00451
Physical climate change risk and ESG green premium
Wang, J., Chen, G.-J., Hsieh, P., & Chen, W.-P. (2024) · Applied Economics · doi:10.1080/00036846.2024.2421456
“After that, we have 109,031 samples of 1,256 enterprises from 2002 to 2020, and define firms with positive g as green firms and those with negative g are defined as brown firms following Avramov et al. (2024).”
Rocciolo, F., Billio, M., Guidolin, M., & Izhakian, Y. (2024) · Social Science Research Network · doi:10.2139/ssrn.5049349
Specifics Matter: An Analysis of Mutual Fund ESG DisclosuresPreprint
Shi, H.-Y., Han, X., Lee, J. B., & Lu, H. (2024) · Social Science Research Network · doi:10.2139/ssrn.4954234
- Authors
- Avramov, D., Lioui, A., Liu, Y., & Tarelli, A.
- Affiliations
- Reichman University (IL)
- Ecole des Hautes Etudes Commerciales du Nord (FR)
- University of Hong Kong (HK)
- Università Cattolica del Sacro Cuore (IT)
- Corresponding author
- Tarelli, Andrea
- Venue
- Management Science
- Publisher
- Elsevier BV
- Published
- 2021
- Volume
- 71
- Issue
- 4
- Pages
- 2867-2889
- ISSN
- 0025-1909 (ISSN-L)
- OpenAlex
- W4399970449
- Cited by
- 62
- References
- 0
- Citations by year
- 2026: 14 · 2025: 19 · 2024: 11 · 2023: 10 · 2022: 7 · 2021: 1
- FWCI
- 15.66
- Type
- journal article
- Language
- en
- Open access
- green
- doi.org
- Locations
- Management Science (publishedVersion)
- SSRN Electronic Journal (acceptedVersion)
- The HKU Scholars Hub (University of Hong Kong) (submittedVersion)
- Topics
- Social Sciences › Economics, Econometrics and Finance › Finance › Sustainable Finance and Green Bonds
- Social Sciences › Economics, Econometrics and Finance › Finance › Financial Markets and Investment Strategies
- Social Sciences › Business, Management and Accounting › Strategy and Management › Corporate Social Responsibility Reporting
- Keywords
- sustainable investment, green assets, convenience yield, conditional asset pricing, ESG premium
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