Bayesian Optimization of ESG Financial Investments
- URL: http://arxiv.org/abs/2303.01485v1
- Date: Fri, 10 Feb 2023 15:17:36 GMT
- Title: Bayesian Optimization of ESG Financial Investments
- Authors: Eduardo C. Garrido-Merch\'an, Gabriel Gonz\'alez Piris, Maria Coronado
Vaca
- Abstract summary: ESG (Economic, Social and Governance) criteria have become more significant in finance.
This paper combines mathematical modelling, with ESG and finance.
- Score: 0.0
- License: http://arxiv.org/licenses/nonexclusive-distrib/1.0/
- Abstract: Financial experts and analysts seek to predict the variability of financial
markets. In particular, the correct prediction of this variability ensures
investors successful investments. However, there has been a big trend in
finance in the last years, which are the ESG criteria. Concretely, ESG
(Economic, Social and Governance) criteria have become more significant in
finance due to the growing importance of investments being socially
responsible, and because of the financial impact companies suffer when not
complying with them. Consequently, creating a stock portfolio should not only
take into account its performance but compliance with ESG criteria. Hence, this
paper combines mathematical modelling, with ESG and finance. In more detail, we
use Bayesian optimization (BO), a sequential state-of-the-art design strategy
to optimize black-boxes with unknown analytical and costly-to compute
expressions, to maximize the performance of a stock portfolio under the
presence of ESG criteria soft constraints incorporated to the objective
function. In an illustrative experiment, we use the Sharpe ratio, that takes
into consideration the portfolio returns and its variance, in other words, it
balances the trade-off between maximizing returns and minimizing risks. In the
present work, ESG criteria have been divided into fourteen independent
categories used in a linear combination to estimate a firm total ESG score.
Most importantly, our presented approach would scale to alternative black-box
methods of estimating the performance and ESG compliance of the stock
portfolio. In particular, this research has opened the door to many new
research lines, as it has proved that a portfolio can be optimized using a BO
that takes into consideration financial performance and the accomplishment of
ESG criteria.
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