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ESG-Valued Portfolio Optimization and Dynamic Asset Pricing

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  • Davide Lauria
  • W. Brent Lindquist
  • Stefan Mittnik
  • Svetlozar T. Rachev

Abstract

ESG ratings provide a quantitative measure for socially responsible investment. We present a unified framework for incorporating numeric ESG ratings into dynamic pricing theory. Specifically, we introduce an ESG-valued return that is a linearly constrained transformation of financial return and ESG score. This leads to a more complex portfolio optimization problem in a space governed by reward, risk and ESG score. The framework preserves the traditional risk aversion parameter and introduces an ESG affinity parameter. We apply this framework to develop ESG-valued: portfolio optimization; capital market line; risk measures; option pricing; and the computation of shadow riskless rates.

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  • Davide Lauria & W. Brent Lindquist & Stefan Mittnik & Svetlozar T. Rachev, 2022. "ESG-Valued Portfolio Optimization and Dynamic Asset Pricing," Papers 2206.02854, arXiv.org.
    • Handle: RePEc:arx:papers:2206.02854
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    Cited by:

    1. Nancy Asare Nyarko & Bhathiya Divelgama & Jagdish Gnawali & Blessing Omotade & Svetlozar Rachev & Peter Yegon, 2023. "Exploring Dynamic Asset Pricing within Bachelier Market Model," Papers 2307.04059, arXiv.org.
    2. Yuan Hu & W. Brent Lindquist & Svetlozar T. Rachev & Frank J. Fabozzi, 2023. "Option pricing using a skew random walk pricing tree," Papers 2303.17014, arXiv.org.
    3. Nancy Asare Nyarko & Bhathiya Divelgama & Jagdish Gnawali & Blessing Omotade & Svetlozar T. Rachev & Peter Yegon, 2023. "Exploring Dynamic Asset Pricing within Bachelier’s Market Model," JRFM, MDPI, vol. 16(8), pages 1-18, July.

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