Essays on the Risks and Returns of Water Investments

Abstract

Water is a vital commodity; essential to life, agriculture and industry. The water industry is one of the largest industries in the world, and is continuously expanding. Humans have been facing substantial water scarcity, especially those in developing countries. However, the severe water stress is not primarily a result of the lack of water resources, but surprisingly, a product of financial underinvestment. Researchers tackle this problem with water mainly from a policymaking perspective, and the driving force of private investments – profit – has been ignored. Hence, there is a need to examine the water industry from the point of view of risks and returns. To fill this gap, the thesis conducts three studies. The first study investigates the profitability and diversification effect of water investments. Value at Risk and Conditional Value at Risk are estimated for optimal risky portfolios. The results indicate that the water asset class outperforms the traditional asset classes (stocks and bonds), and has the capacity to produce diversification effects in portfolios primarily comprised of listed equity and bond assets. To further understand the factors associated with expected returns, the second study investigates the impact of asset liquidity risk on water companies’ stock returns.