Mathematical Finance

On ESG Investing: Heterogeneous Preferences, Information, and Asset Prices
2023-01-13 14:00 - 15:00 (America/Chicago) | via Zoom
Speaker: Prof. Lin Shen, Department of Finance, INSEAD, Fontainebleau, Fr.
Abstract: We study how environmental, social and governance (ESG) investing reshapes in-formation aggregation by prices. We develop a rational expectations equilibrium model in which traditional and green investors are informed about ﬁnancial and ESG risks but have diﬀerent preferences over them. Because of the preference het-erogeneity, traditional and green investors trade in the opposite directions based on the same information. We show that the equilibrium price may not be uniquely determined. An increase in the fraction of green investors and an improvement in the ESG information quality can reduce price informativeness about the ﬁnancial payoﬀ and raise the cost of capital.

Does sustainability generate better financial performance? Review, meta-analysis, and propositions
2023-01-20 14:00 - 15:00 | via Zoom
Speaker: Ulrich Atz, Stern School of Business, NYU
Abstract: Sustainability in business and ESG (environmental, social, and governance) in finance have exploded in popularity among researchers and practitioners. We surveyed 1,141 primary peer-reviewed papers and 27 meta-reviews (based on ∼1,400 underlying studies) published between 2015 and 2020. Aggregate conclusions from a sample suggest that the financial performance of ESG investing has on average been indistinguishable from conventional investing (with one in three studies indicating superior performance) – in contrast with research in the wider management literature as well as industry reports. Until recently top finance journals did not publish climate change related studies, yet these studies capture the frontier of corporate risk and ESG investment strategies. We developed three propositions: first, ESG integration as a strategy seems to perform better than screening or divestment; second, ESG investing provides asymmetric benefits, especially during a social or economic crisis; and third, decarbonization strategies can potentially capture a climate risk premium.

Sustainable Finance and E, S, and G Issues – Values versus value
2023-01-27 14:00 - 15:00 | via Zoom
Speaker: Prof. Laura T Starks, G. Kozmetsky Distinguished University Chair and Professor of Finance; University of Texas at Austin
Abstract: TBA

Cross-dispersion bias-adjusted ESG rankings
2023-02-03 12:00 - 13:00 | via Zoom
Speaker: Prof. Jean-Charles Garibal, Grenoble School of Management
Abstract: We study the formation of ESG scores and rankings. In particular, we investigate the impact of aggregation rules when combining information on firms across categories, notably the E, S and G categories, into single ESG scores. Usual aggregation rules may bias scores toward the most dispersed category. We suggest a correction for this dispersion bias. We apply this correction to scores provided by two of the main score providers: Refinitiv and Bloomberg. We also provide simulation evidence. We show that the cross-dispersion bias may have a significant impact on ESG scores formation and that our proposed adjustment tends to weather it.

International market exposure to sovereign ESG
2023-02-10 14:00 - 15:00 | via Zoom
Speaker: Christian Morgenstern, School of Public Health, Imperial College London
Abstract: We quantify equity and bond market sensitivity to sovereign ESG scores and their variations which, theoretically, is equivalent to evaluating the demand for ESG at the global scale. We do so by estimating a longitudinal model, at the issue level, that captures exposures to sovereign ESG factors for both equity and fixed income indices. In spite of the surging interest in ESG investing, our results do not support a strong impact of ESG factors on the returns of international markets, implying that the demand for ESG at the country level is not a significant driver of prices. Nevertheless, we document a strong association between GDP growth and ESG scores at the country level.

The dilemma between ‘comply or explain’ and SRI, ESG methodology; transitional terminology
2023-02-17 16:00 - 17:00 | via Zoom
Speaker: Prof. Kazuyuki Shimizu, School of Business Administration, Meiji University
Abstract:This paper tries to find out what the difference is between ESG and SRI. ESG developed from the SRI concept with “comply and explain” which was introduced in 1992, and it creates difficulties between their concepts and also can make difficulties for their methodological development. ESG and SRI had different concepts from each other before, but they mix their methodologies after this introduction. Both concepts need to be rechecked against the pure (principle) model. ESG and SRI have different investment strategy which tries to capture both financial returns and societal good. The fundamental question of this dilemma between SRI and ESG is analysed with three steps.

At first, the difference between the SRI investment approaches was investigated. The logical implication of SRI refers to a segmentation (Euler diagram). It contains three segments. The economic segment forms the smallest circle in the core and the social segment embedded within the environmental component. The Euler diagram is showing a clear stance for the limitation of environmental resources, compared to Venn’s idea. The Venn diagram reveals an interactional relationship between the economy, society and the environment but is not interdependent, that is why stocks were selected on the basis of investment assessment in favour of unlimited inclusion rather than limited exclusion.

Secondly, as far as the SRI and ESG investment approach is concerned, the stocks should serve as a screen in the evaluation process. The screen can be applied with either exclusionary (negative) or inclusionary (positive) methodology. According to GSIA, The largest sustainable investment strategy globally is exclusionary screening ($15.02 trillion). However, the “exclusionary strategy” that several index firms are using still includes the stocks dealing with Alcohol such as Diageo plc, and others exclude industries such as Gambling, Tobacco, Military Weapons, Civilian Firearms, Nuclear Power, Adult Entertainment and Genetically Modified Organisms. Therefore, this paper gave a trial difference between SRI and ESG from the historical and methodological point of view. SRI needs to be in place before the introduction of the “comply or explain” idea in 1992. After that, the index used might be ESG, which assesses more through the “included exclusion” criteria.

Finally, the performance of ESG and SRI are investigated, compared with a known-ESG index such as the MSCI world index. The DJSI World index is applied as an SRI category and the FTSE4GOOD index as the ESG group. There is skepticism between social responsibility and financial performance. Then, we found stability in SRI in the long-term capital performance, especially during the crisis. However, ESG methodology reveals almost the same movement, like the MSCI world index. Values are changing due to crises such as Lehman and the Covid19 shock. Therefore, I would like to consider ethics and stock performance by comparing the performance of SRI and ESG with stocks excluded by the Norwegian Pension Fund’s own ethical standards. Ethics and stock performance are levelled by countervailing power of the values of various AIs and DAOs with human values.

Equity costs and risks in emerging markets: Are ESG and Sharia principles complementary?
2023-02-24 12:00 - 13:00 | via Zoom
Speaker: Stefan Pisera, Dept. of Economics & Statistics, University of Udine
Abstract: By proposing a novel continuous and time-varying measure of Sharia compliance, we investigate whether it enhances the effects of corporate social responsibility, proxied by Environmental-Social-Governance scores, on firms’ equity costs and market risks in emerging countries. We construct a large dataset of non-financial listed firms incorporated in eighteen emerging markets, both Sharia-compliant and conventional (4612 firm-year observations from 2002 to 2018), finding a consistent, statistically significant, and negative association between the interaction of ESG scores and the Sharia sensitivity with the cost of equity. Moreover, we reveal that this negative relationship is mediated by firms’ market risk (risk channel).

Do lower ESG rated companies have higher systemic impact? Empirical Evidence from Europe and the United States
2023-03-03 12:00 - 13:00 | via Zoom
Speaker: Prof. Sandra Paterlini, Economics and Management, University of Trento

Abstract: In recent years, companies have increasingly been characterized by environ- mental, social, and governance (ESG) scores, and investors and academics have raised questions concerning financial performance and investment risks. Now, as the European Banking Authority has acknowledged that ESG risks can potentially impact the economic and financial system, the debate on systemic risk has gained traction. Understanding the relationship between ESG merit and systemic risk is of utmost importance for the stability of the eco- nomic and financial system, still, research is limited. Relying on real-world European and US data, we quantify systemic risk by means of QL-CoVaR. Empirical analyses of the entire period from 2007-2021 show that compa- nies with high ESG scores tend to exhibit low QL-CoVaR values indicating a positive effect of ESG scores. Such evidence is confirmed by clustering the individual companies into ESG portfolios and focusing on COVID-19. Additional insights using the individual pillars are also provided.

Risk-return performance of optimized ESG equity portfolios in the NYSE
2023-03-10 09:00 - 10:00 | via Zoom
Speaker: Prof. Javier Lopez Prol, Economics & Environmental Finance, Yonsei University (Mirae)
Abstract: The literature on the risk-return performance of equity portfolios depending on their ESG score is mixed. While most studies use some variant of Fama-French, we optimize equity portfolios of the NYSE between 2018-2019 according to the Markovitz mean-variance framework depending on their ESG scores to better reflect the behavior of financial agents. We then systematically analyze the optimal and efficient portfolio performance and find that high ESG portfolios have lower volatility and even lower returns, resulting in lower Sharpe ratios. The lower performance of high ESG portfolios is homogeneous across the three ESG components and robust across specifications.

TTU Spring Break - no mathematical finance seminar
2023-03-17

A Comparison of ESG and Credit Ratings
2023-03-24 12:00 - 13:00 | via Zoom
Speaker: Prof. Thierry Roncalli, Head of Quantitative Research, Amundi Institute; and Adjunct Prof. of Economics, University of Evry
Abstract: In this talk, we analyze the construction of ESG ratings and investigate their time dynamics. For that, we build the migration matrix of ESG ratings and assess the probabilistic properties of the associated Markov chain. We observe differences between ESG rating systems. Some of them are more reactive, others present a best-in-class or worst-in-class bias. Finally, we compare them with credit ratings, and highlight the main differences.

ESG compliant optimal portfolios: The impact of ESG constraints on portfolio optimization in a sample of European stocks
2023-03-31 12:00 - 13:00 | via Zoom
Speaker: Beatrice Bertelli, Dept. of Economics, Università degli Studi di Modena e Reggio Emilia
Abstract: The introduction of the Environmental, Social, Governance (ESG) dimensions in setting up optimal portfolios has been becoming of uttermost importance for the financial industry. Given the absence of consensus in empirical literature and the limited number of studies providing performance comparison of ESG strategies, the aim of this paper is to assess the impact of ESG on optimal portfolios and to compare different approaches to the construction of ESG compliant portfolios. Following Varmaz et al. (2022) optimization model, we minimize portfolio residual risk by imposing a desired level of portfolio average systemic risk and ESG (measured by Bloomberg ESG score) over both an unscreened and a screened sample based on the 586 stocks of the EURO STOXX Index in the period January 2007 – August 2022.

These are the main results.
• Regardless of the level of portfolio systemic risk, the Sharpe ratio of the optimal portfolios worsens as the target ESG level increases.
• The Sharpe ratio dynamics of portfolios with the highest average ESG scores follows market phases: it is very close to/higher than other portfolios in bull markets, whereas it underperforms in stable or bear markets suggesting that ESG portfolios do not seem to represent a safe haven.
• Negative screenings with medium-low threshold reduce the performance of optimal portfolios with respect to optimization over an unscreened sample. However, when adopting a very severe screening we obtain a superior performance implying that very virtuous companies allows investors to do well by doing good.

Seminar Cancelled
2023-04-07
Speaker: Prof. Nandita Das, College of Business, Delaware State University
Title:Is there a difference in ESG fund performance among different economies?
This is joint work with Prof. Aman Sunder, Dean of the Graduate School, College for Financial Planning, Centennial CO
Abstract: Public preference for Socially Responsible practices has grown exponentially over the past two decades. According to USSIF the estimated assets under management for SRMF was close to $17 trillion in 2019. Assets are poised to reach $41 trillion by the end of this year according to Bloomberg Intelligence estimates. Money held in sustainable mutual funds and ESG-focused exchange-traded funds rose globally by 53% in 2021 to $2.7 trillion according to Morningstar Inc. The AUM of ESG Funds in India is currently at Rs. 11,956 crores as per AMFI as of Mar 31, 2022.
This paper examines the risk-adjusted performance for socially responsible mutual funds (SRMF) in two different economies- US and India. Investors from different countries will probably weigh each of ESG criterion differently. The goal is to compare the performance of ESG funds based on overall score and specific criterion scores of a developed country with a developing country. We compare the results of funds with a high ESG rating in a developed country (US) with those in a developing country (India). For example, in US it appears that Environment factor is more crucial to investors, and it is possible that Governance might be a bigger factor in a developing country. As for the comparability of performance, there is no statistical difference in performance between the two economies for top-rated funds. This is not the case for the bottom-rated funds. The findings also show size to be a priced risk-factor for both the economies.

How Do Investors Value Sustainability? A Utility-Based Preference Optimization
2023-04-14 | via Zoom
Speaker: Dr. Aydin Aslan, Department of Finance, Technical University of Dortmund
Abstract: We investigate how an investor’s preference for sustainable assets in the portfolio varies for differing levels of risk aversion. Using a sample of 411 publicly listed firms in the S&P 500, we calculate financial and sustainability returns, on which the investor’s utility depends. We approximate the investor’s preference by the exponential and s-shaped utility function and optimize with regard to the sustainability preference. We find that with increasing levels of risk aversion, both minimum-variance and maximum Sharpe ratio type investors seek to incorporate sustainable assets in the portfolio.

Did ESG Save the Day? Evidence From India During the COVID 19 Crisis
2023-04-21 10:00 - 23:00 | via Zoom
Speaker: Prof. Ved Beloskar, Modi School of Commerce, NMIMS Deemed to be University, Mumbai
Abstract: Investors have shown increasing interest in Socially Responsible Investments (SRI) in the past few years, especially during the financial crisis caused due to the outbreak of the COVID-19 pandemic. SRI are evaluated on the basis of Environmental, Social and Governance (ESG) criteria. ESG information allows investors to assess the risks associated with a particular firm and how the firm manages or intends to manage future risks. Amidst the increasing investor interest in ESG products, we attempt to study the value addition of ESG performance to investors during crisis period. Using a sample of ESG rated firms listed on the Bombay Stock Exchange (BSE), we examine the investment performance, trading volumes and return volatility of ESG stocks in an emerging market like India during the COVID-19 crisis. The results of our event study conducted around the important events that have occurred in India during the COVID-19 pandemic provide evidence that investors can use ESG information as a signal of future stock performance. Most importantly, ESG performance provides downside protection during crisis times. Our results show that ESG performance does not prove to be detrimental to investment performance during normal times. Also, ESG performance was found to reduce stock return volatility during the COVID-19 pandemic. Overall, our study attempts to establish an investment case for ESG stocks in emerging markets in India by providing support to the good management hypothesis.

Hedonic Models of Real Estate Prices with ESG Factors
2023-04-28 15:00 - 16:00 | via Zoom
Speaker: Jason Bailey, Department of Math & Statistics, Texas Tech University
Abstract: With the increasing importance of ESG factors in real estate constructions and prices, we investigate commonly-accepted factors in real estate prices through hedonic models and then apply the select ESG factors of green-home, air-conditioning, accessibility, and waterfront to evaluate their impact and significance in increasing the predictive powers of the models. In particular, we investigate the use of a P-spline generalized additive hedonic model (GAM) for real estate prices in large U.S. cities and contrast their predictive efficiency against commonly-used linear and polynomial-based generalized linear models (GLMs). Using intrinsic and extrinsic factors available from Redfin, we show that the GAM model is capable of describing 84% to 92% of the variance in the expected ln(sales price) based upon 2021 data. In contrast, a strictly-linear GLM accounted for 65% to 78% of the variance, while polynomial-based GLMs accounted for 82% to 88%. As climate change is becoming increasingly important, we utilized the GAM model to examine the significance of environmental factors in two urban centers along the Pacific Northwest. While the results indicate city-dependent differences in the significance of environmental factors, we find that multiple environmental factors were significant with their inclusion increasing the adjusted R2 of the GAM model by slightly less than 1%.

Seminar Cancelled - Deep Reinforcement Learning for ESG financial portfolio management
2023-09-11 12:00 - 13:00 | via Zoom
Speaker: Prof. Eduardo C. Garrido Merchán, Faculty of Economic and Business Sciences (ICADE), Comillas Universidad Pontifica
Abstract: This paper investigates the application of Deep Reinforcement Learning (DRL) for Environment, Social, and Governance (ESG) financial portfolio management, with a specific focus on the potential benefits of ESG score-based market regulation. We leveraged an Advantage Actor-Critic (A2C) agent and conducted our experiments using environments encoded within the OpenAI Gym, adapted from the FinRL platform. The study includes a comparative analysis of DRL agent performance under standard Dow Jones Industrial Average (DJIA) market conditions and a scenario where returns are regulated in line with company ESG scores. In the ESG-regulated market, grants were proportionally allotted to portfolios based on their returns and ESG scores, while taxes were assigned to portfolios below the mean ESG score of the index. The results intriguingly reveal that the DRL agent within the ESG-regulated market outperforms the standard DJIA market setup. Furthermore, we considered the inclusion of ESG variables in the agent state space, and compared this with scenarios where such data were excluded. This comparison adds to the understanding of the role of ESG factors in portfolio management decision-making. We also analyze the behaviour of the DRL agent in IBEX 35 and NASDAQ-100 indexes. Both the A2C and Proximal Policy Optimization (PPO) algorithms were applied to these additional markets, providing a broader perspective on the generalization of our findings. This work contributes to the evolving field of ESG investing, suggesting that market regulation based on ESG scoring can potentially improve DRL-based portfolio management, with significant implications for sustainable investing strategies.

ESG integration strategy for stocks portfolios based on a resampling methodology with a multivariate normal distribution
2023-09-22 14:00 - 15:00 | via Zoom
Speaker: Prof. Antonio Francisco de Almeida da Silva Jr., Department of Business Administration, Universidade Federal de Bahia, Salvador Brazil
abstract: The aim of the work is to present a framework for ESG integration and to analyze the consequences of considering environmental, social and governance (ESG) factors in the optimization of investment portfolios. We use a multivariate normal distribution of returns and we generate portfolios by an optimization process combined with a Monte Carlo simulation. After applying an ESG filtering strategy to portfolios, we show that the ex-ante costs (optimization process) of the ESG integration strategy may be very low compared to other approaches. The methodology presented in this paper avoid the complexity of modifying the utility function to include a new objective.

Folly and Fantasy in Finance
2023-09-29 14:00 - 15:00 | via Zoom
Speaker: Prof. Dilip Madan, Robert H. Smith School of Business, University of Maryland
Abstract: Strategies for selecting hedging measures that both respect certain market values of cash flows and yet maintain control on their distance from physical measures are advocated, proposed and implemented. The hedging criterion is the maximization of a conservative valuation of the hedged position. Such values are modeled as nonlinear expectations based on measure distortions. Measure selections and conservative value maximizing hedges are illustrated for options on SPY and nine sector ETFs.
Speaker Bio: Dilip Madan is Emeritus Professor of Finance at the Robert H. Smith School of Business. He specializes in Mathematical Finance. Currently he serves as a consultant to Morgan Stanley, Meru Capital and Caspian Capital. He has also consulted with Citigroup, Bloomberg, the FDIC and Wachovia Securities. He is a founding member and Past President of the Bachelier Finance Society. He received the 2006 von Humboldt award in applied mathematics, was the 2007 Risk Magazine Quant of the year, received the 2008 Medal for Science from the University of Bologna and held the 2010 Eurandom Chair. He is managing editor of Mathematical Finance, co-editor of the Review of Derivatives Research, associate editor of the Journal of Credit Risk and Quantitative Finance. His work is dedicated to improving the quality of financial valuation models, enhancing the performance of investment strategies, and advancing the efficiency of risk allocation in modern economies. Recent major contributions have appeared in Mathematical Finance, Finance and Stochastics, Quantitative Finance, the Journal of Computational Finance, The International Journal of Theoretical and Applied Finance, The Journal of Risk, The Journal of Credit Risk among other journals.

Identification and Estimation of Parameter Instability in High Dimensional Approximate Factor Models
2023-10-06 14:00 - 15:00 | via Zoom
Speaker: Prof. Ruiqi Liu, Department of Mathematics & Statistics, Texas Tech University
Abstract: This paper introduces a novel approach for estimating structural break ratios in the factor loadings of high-dimensional approximate factor models, where the breaks occur at unknown common dates and the number of factors is unknown. Our method is based on the observation that the sum of the numbers of pseudo factors in the pre- and post-split subsamples is minimized when the sample is split at the structural break. By appropriately transforming these criteria using the eigenvalue ratios of the covariance matrices of the pre- and post-split subsamples, we derive consistent estimators for the structural break ratios. Notably, our framework exhibits remarkable flexibility in accommodating weak factors and can be easily extended to handle multiple breaks. We also introduce a data-driven process to determine the number of breaks. Monte Carlo simulations demonstrate good performance of the proposed estimators. Furthermore, in an empirical analysis of the FRED-MD dataset, we identify two structural breaks around January 1983 and March 2009.

Strong vs. Stable: The Impact of ESG Ratings Momentum and their Volatility on the Cost of Equity Capital
2023-10-13 12:00 - 13:00 | via Zoom
Speaker: Massimo Guidolin, Department of Finance, Bocconi University, Milan, Italy
Abstract: We test the performance of two ESG score-driven quantitative signals on a large, multi-national crosssection of European stock returns. In particular, we ask whether in the cross-section, the cost of equity capital is more strongly affected by the (upward) “slope” (identified as momentum over a period of time) of their ESG scores or by their “stability” (identified as the volatility of the scores over a period of time), measured around a given slope. We find that 1-month, short-term ESG momentum is priced in the cross-section of stock returns and that it lowers the ex-ante cost of capital (at the same time causing realised ex-post average abnormal returns). Short-term ESG momentum may represent a novel, priced systematic risk factor. There is equally strong evidence that a ESG spread strategy that buys (sells) low (high) ESG score volatility stocks leads to a significant alpha and alters the ex-ante cost of capital. Both quantitative ESG signals lead to portfolio sorts and long-short strategies that increase the speed of improvement of the aggregate sustainability profile of the resulting portfolios with no costs in terms of average ESG scores or their stability. (This is joint work with I. Berk and M. Magnani.)

Investigating Short-Term Dynamics in Green Bond Markets
2023-10-27 12:00 - 13:00 | via Zoom
Speaker: Prof. Lorenzo Mercuri, Dept. of Economics, Management & Quantitative Finance Methods, University of Milan
Abstract: The paper investigates the effect of the label green in bond markets from the lens of the trading activity. The idea is that jumps in the dynamics of returns have a specific memory nature that can be well represented through a self-exciting process. Specifically, using Hawkes processes where the intensity is described through a continuous time moving average model, we study the high frequency dynamics of bond prices. We also introduce a bivariate extension of the model that deals with the cross-effect of upward and downward price movements. Empirical results suggest that differences emerge if we consider periods with relevant interest rate announcements, especially in the case of an issuer operating in the energy market.

When ESG talks: ESG tone of 10-K reports and its significance to stock markets
2023-11-03 14:00 - 15:00 | via Zoom
Speaker: Dr. Konstantin Ignatov, WHU – Otto Beisheim School of Management
Abstract Since the ESG topic consistently gains on importance in the investment universe, companies provide investors with information regarding recent and future ESG activities through different reporting channels. The most recent research finds relevance of ESG-related corporate activities for formation of investors’ opinion regarding companies’ valuations and growth prospects. Based on a sample of more than seventeen thousand unique 10-K reports of US companies filed with SEC in period 2013 to 2019 and the word-power methodology proposed by Jegadeesh and Wu (2013), this study also shows evidence for significant relation of ESG textual tone of 10-K reports to stock market returns of filing companies around the report filing dates. Using the ESG linguistic dictionary recently proposed by Baier, Berninger, and Kiesel (2020), this study shows evidence for significant relation of social and governance-related topics disclosure to stock returns, while environmental narratives being ignored by the markets. When looking at individual words from the ESG lexicon, such words as “community”, “health”, “control” imply positive reaction of markets, while “discrimination”, “embezzlement”, and “crime” are related to negative returns. The robustness analysis based on the inverse document frequency word weightings and actual ESG performance scores confirms the significance of ESG information disclosure of 10-K reports for investors. Thus, this study sheds light on the mechanics of ESG information perception and its influence on capital markets.

Modeling Bitcoin Volatility: A Dual Perspective Analysis
2023-11-08 14:00 - 15:00 | via Zoom
Speaker: Prof. Abootaleb Shirvani, Dept. of Mathematical Sciences, Kean University
Abstract: Understanding the volatility of speculative assets is critical for investment decisions. Given that Bitcoin is considered, at least by some, a potential alternative to fiat money, its volatility characteristics are of particular concern. It is, therefore, essential to comprehend and appropriately model the process governing Bitcoin’s volatility.
In this presentation, we offer two perspectives for analyzing Bitcoin’s volatility. First, we introduce a doubly subordinated Levy process called the Normal Double Inverse Gaussian to model the time series properties of the cryptocurrency Bitcoin. We also developed an arbitrage-free option pricing model based on the NDIG process, providing a fresh perspective on Bitcoin valuation.
Within this model, we derive two distinct measures of Bitcoin volatility. The first measure combines NDIG option pricing with the Chicago Board Options Exchange VIX model to compute an implied volatility measure that reflects the viewpoints of options traders. The second measure investigates implied volatility in the real world, considering the perspectives of spot traders and utilizing an intrinsic time formulation.
Both volatility measures are compared to a historical standard deviation-based volatility. With appropriate linear scaling, the NDIG process perfectly captures the observed in-sample volatility.

Optimal Portfolio with Sustainable Attitudes under Cumulative Prospect Theory
2023-11-10 12:00 - 13:00 | via Zoom
Speaker: Prof. Massimiliano Kaucic, Department of Economics, Business, Mathematics & Statistical Sciences, University of Trieste
Abstract: In the last five years, extreme events such as the COVID-19 pandemic and the Ukrainian crisis have highlighted the importance of corporate social responsibility and sustainable principles. Consequently, the investment process is changing toward more ethical choices. In this context, we extend the classical optimization framework under the cumulative prospect theory (CPT) in two directions. We first consider an agent who maximizes a financial CPT-value function preselecting the assets to be included in the portfolio based on their environmental, social, and governance (ESG) scores. Then, we develop a bi-objective model that optimizes financial and sustainable CPT-value functions at the same time. Numerical results obtained on an investable universe from the constituents of the STOXX Europe 600 show that introducing ESG information improves the portfolio’s financial performance.

No Math Finance seminar - Thanksgiving break
2023-11-24 14:00 - 15:00

Convergence of the fixed-point iteration for the Bass Local Volatility model
2024-01-12 12:00 - 13:00 | via Zoom
Speaker Dr. Gudmund Pammer, Dept. of Mathematics, ETH Zürich
Abstract: The Bass local volatility model introduced by Backhoff-Veraguas–Beiglböck–Huesmann–Källblad is a Markov model perfectly calibrated to vanilla options at finitely many maturities, that approximates the Dupire local volatility model. Conze and Henry-Labordère show that its calibration can be achieved by solving a fixed-point nonlinear integral equation. We complement the analysis and show, under suitable assumptions, existence and uniqueness of the solution to this equation, and establish that the fixed-point iteration scheme converges at linear rate.
The talk is based on joint work with Beatrice Acciaio and Antonio Marini.

Risk budgeting portfolios: Existence and computation
2024-01-19 12:00 - 13:00 | via Zoom
Speaker: Prof. Olivier Guéant, Department of Applied Mathematics, Université Paris 1 Panthéon-Sorbonne
Abstract: Modern portfolio theory has provided for decades the main framework for optimizing portfolios. Because of its sensitivity to small changes in input parameters, especially expected returns, the mean-variance framework proposed by Markowitz (1952) has however been challenged by new construction methods that are purely based on risk. Among risk-based methods, the most popular ones are Minimum Variance, Maximum Diversification, and Risk Budgeting (especially Equal Risk Contribution) portfolios. Despite some drawbacks, Risk Budgeting is particularly attracting because of its versatility: based on Euler’s homogeneous function theorem, it can indeed be used with a wide range of risk measures. This paper presents mathematical results regarding the existence and the uniqueness of Risk Budgeting portfolios for a very wide spectrum of risk measures and shows that, for many of them, computing the weights of Risk Budgeting portfolios only requires a standard stochastic algorithm.

On subordinated generalizations of 3 classical models of option pricing
2024-01-26 12:00 - 13:00 | via Zoom
Speaker: Dr. Grzegorz Krzyżanowski, Hugo Steinhaus Center, Faculty of Pure and Applied Mathematics, Wroclaw University of Science and Technology
Abstract: We will investigate the relation between Bachelier and Black-Scholes models driven by the infinitely divisible inverse subordinators. Such models, in contrast to their classical equivalents, can be used in markets where periods of stagnation are observed. We will introduce the subordinated Cox-Ross-Rubinstein model and prove that the price of the underlying in that model converges in distribution and in Skorokhod space to the price of underlying in the subordinated Black-Scholes model. Motivated by this fact we will price the selected option contracts using the binomial trees. The comparison to other numerical methods will be provided.

Good for the Planet, Good for the Wallet: The ESG Impact on Financial Performance in India
2024-02-09 14:00 - 15:00 | Department of Mathematics & Statistics, TTU
Speaker: Prof. Tauhidul Islam Tanin, EGADE Business School, Technologico de Monterrey
Abstract: We examine the impact of ESG practices on financial performance among Nifty 50 companies in India from 2015 to 2022. Utilizing fixed-effects panel quantile regression, we observe that the relationship between ESG practices and financial profitability varies across the ROE distribution. While the environmental pillar score and the governance pillar score negatively impact ROE across almost all quantiles with high statistical significance, the social pillar score exhibits mostly an insignificant relationship. Its impact is negative, but only mildly statistically significant at the lower end of the ROE distribution. The findings and their implications are important for investors, corporate executives, and policymakers.
