Opportunities and Risks in Alternative Investments

This thesis revolves around the quantification of opportunities and risks in alternative investments. The first chapter is on the topic of asset pricing, whereas the second and third chapter concern energy finance. Each chapter can be read independently.
The first chapter considers skills and preferences of dierent types of investors when invest-ing sustainably. We document a positive environmental, social, and governance (ESG) premium among stocks with non-ESG-motivated ownership, which we attribute to the investors’ unique skill to forecast future ESG scores. When higher ESG scores materialize, ESG-motivated investors buy stocks of these firms, which pushes up the price and gives low returns going forward. The ESG premium under non-ESG-motivated ownership is stronger during periods of high climate senti-ment. We explain these results by a theory of sustainable investing with heterogeneous skill and sustainability sentiment.
The second chapter researches correlation dynamics between wind energy production and elec-tricity prices. I show that large turbines outperform their smaller peers. That is, large turbines produce more and with higher persistence over time. Also, production outputs are less negatively correlated to electricity prices, which puts them in a position in which they yield a higher average price per production unit. This eect is especially pronounced during high and low production times. Additional tests on high-frequency data confirm these results and provide evidence that the realized price eects from negative correlations between production and electricity prices are much larger than monthly data suggests and economically meaningful.
The third chapter develops a novel theoretical approach to value wind energy investments with a special focus on a Danish policy change concerning subsidy systems. The model incorporates risk exposures to a number of relevant parameters and especially considers uncertainty in subsidy distributions over time. I use the approach to model investment opportunities in wind energy through a Monte Carlo simulation and provide more clarity on which risk factors matter most. I further show that small structural changes in subsidy specifications can have significant impacts on investment decisions by private investors and therefore capital allocations at large.