ESG ratings provide a quantitative measure for socially responsibleinvestment. We present a unified framework for incorporating numeric ESGratings into dynamic pricing theory. Specifically, we introduce an ESG-valuedreturn that is a linearly constrained transformation of financial return andESG score. This leads to a more complex portfolio optimization problem in aspace governed by reward, risk and ESG score. The framework preserves thetraditional risk aversion parameter and introduces an ESG affinity parameter.We apply this framework to develop ESG-valued: portfolio optimization; capitalmarket line; risk measures; option pricing; and the computation of shadowriskless rates.
ESG-Valued Portfolio Optimization and Dynamic Asset Pricing
Davide Lauria
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2022-01-01
Abstract
ESG ratings provide a quantitative measure for socially responsibleinvestment. We present a unified framework for incorporating numeric ESGratings into dynamic pricing theory. Specifically, we introduce an ESG-valuedreturn that is a linearly constrained transformation of financial return andESG score. This leads to a more complex portfolio optimization problem in aspace governed by reward, risk and ESG score. The framework preserves thetraditional risk aversion parameter and introduces an ESG affinity parameter.We apply this framework to develop ESG-valued: portfolio optimization; capitalmarket line; risk measures; option pricing; and the computation of shadowriskless rates.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
