ENVIRONMENT AND FINANCE: WHY WE SHOULD MAKE THE ENVIRONMENT A PART OF THE FINANCIAL MARKETS

Abstract

This paper represents a proposal to create a kind of financia! markets out of environmental improvements. We shall explain how to do it, and why the financia! approach is practically the only one able to stop and invert the environmental degradation. Particularly, we shall concentrate our attention in deforestation and show how to produce effectively reforestation. With a model of the current and future situation, we consider a 0-th dimensional squared Bessel process with drift. We justify our choice as a limit of branching phenomena. In the game of reforestation versus deforestation, we solve the optimization problem of the first move needed to start the project. On the other hand, because we are aiming for the creation of a developed market, we consider the classical Merton's problem with underlying asset instead of Geometric Brownian motion.