ESG-Valued Portfolio Optimization and Dynamic Asset Pricing

Davide Lauria, W. Brent Lindquist, Stefan Mittnik and Svetlozar T. Rachev

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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.

Date: 2022-06
New Economics Papers: this item is included in nep-fmk
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