Optimal portfolio of defined contribution pension plan with climate risk under model uncertainty

Zihui Wang; Ke Su; Peiguang Wang; Zihui Wang; Ke Su; Peiguang Wang

doi:10.3934/era.2025310

Electronic Research Archive

2025, Volume 33, Issue 11: 7034-7051. doi: 10.3934/era.2025310

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Research article

Optimal portfolio of defined contribution pension plan with climate risk under model uncertainty

School of Mathematics and Information Science, Hebei University, Baoding 071002, China

Received: 24 September 2025 Revised: 05 November 2025 Accepted: 12 November 2025 Published: 20 November 2025

This manuscript researches the optimal portfolio of the defined contribution (DC) pension plan, comprising a stock index and cash within a dynamic model that incorporates uncertainty regarding climate change. The global temperature is supposed to have an impact on the stock index price, with the probability distribution of the global temperature considered uncertain. To address this uncertainty, we apply Girsanov's theorem for measure transformation. The optimal investment strategy under climate uncertainty and stochastic interest rates is derived in closed form. We further demonstrate that climate uncertainty can result in specific losses in returns. We discover through numerical analysis that the investment in the stock index is especially sensitive to climate uncertainty.
- optimal portfolio,
- climate uncertainty,
- stochastic interest rate,
- Girsanov's theorem,
- global temperature
Citation: Zihui Wang, Ke Su, Peiguang Wang. Optimal portfolio of defined contribution pension plan with climate risk under model uncertainty[J]. Electronic Research Archive, 2025, 33(11): 7034-7051. doi: 10.3934/era.2025310

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Abstract

This manuscript researches the optimal portfolio of the defined contribution (DC) pension plan, comprising a stock index and cash within a dynamic model that incorporates uncertainty regarding climate change. The global temperature is supposed to have an impact on the stock index price, with the probability distribution of the global temperature considered uncertain. To address this uncertainty, we apply Girsanov's theorem for measure transformation. The optimal investment strategy under climate uncertainty and stochastic interest rates is derived in closed form. We further demonstrate that climate uncertainty can result in specific losses in returns. We discover through numerical analysis that the investment in the stock index is especially sensitive to climate uncertainty.

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