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Bachelier’s Market Model for ESG Asset Pricing

Author

Listed:
  • Svetlozar Rachev

    (Department of Mathematics and Statistics, Texas Tech University, Lubbock, TX 79409-1042, USA)

  • Nancy Asare Nyarko

    (Department of Mathematics and Statistics, Texas Tech University, Lubbock, TX 79409-1042, USA)

  • Blessing Omotade

    (Department of Mathematics and Statistics, Texas Tech University, Lubbock, TX 79409-1042, USA)

  • Peter Yegon

    (Department of Mathematics and Statistics, Texas Tech University, Lubbock, TX 79409-1042, USA)

Abstract

Environmental, Social, and Governance (ESG) finance is a cornerstone of modern finance and investment, as it changes the classical return-risk view of investment by incorporating an additional dimension to investment performance: the ESG score of the investment. We define the ESG price process and include it in an extension of Bachelier’s market model in both discrete and continuous time, enabling option pricing valuation.

Suggested Citation

  • Svetlozar Rachev & Nancy Asare Nyarko & Blessing Omotade & Peter Yegon, 2024. "Bachelier’s Market Model for ESG Asset Pricing," JRFM, MDPI, vol. 17(12), pages 1-23, December.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:12:p:553-:d:1540241
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    References listed on IDEAS

    as
    1. Davide Lauria & W. Brent Lindquist & Stefan Mittnik & Svetlozar T. Rachev, 2022. "ESG-Valued Portfolio Optimization and Dynamic Asset Pricing," Papers 2206.02854, arXiv.org.
    2. Svetlozar T. Rachev & Stoyan V. Stoyanov & Frank J. Fabozzi, 2017. "Financial Markets With No Riskless (Safe) Asset," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 20(08), pages 1-24, December.
    3. Andersson, Fredrik N.G. & Jonung, Lars, 2020. "Lessons from the Swedish Experience with Negative Central Bank Rates," Working Papers 2020:15, Lund University, Department of Economics.
    4. Pasricha, Puneet & He, Xin-Jiang, 2022. "Skew-Brownian motion and pricing European exchange options," International Review of Financial Analysis, Elsevier, vol. 82(C).
    5. Roll, Richard, 1984. "A Simple Implicit Measure of the Effective Bid-Ask Spread in an Efficient Market," Journal of Finance, American Finance Association, vol. 39(4), pages 1127-1139, September.
    6. Eugene F. Fama & Kenneth R. French, 2004. "The Capital Asset Pricing Model: Theory and Evidence," Journal of Economic Perspectives, American Economic Association, vol. 18(3), pages 25-46, Summer.
    7. Hu, Yuan & Lindquist, W. Brent & Rachev, Svetlozar T. & Shirvani, Abootaleb & Fabozzi, Frank J., 2022. "Market complete option valuation using a Jarrow-Rudd pricing tree with skewness and kurtosis," Journal of Economic Dynamics and Control, Elsevier, vol. 137(C).
    Full references (including those not matched with items on IDEAS)

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