Responsible Investing: A Multi-period Portfolio Selection Model

37 Pages Posted: 1 May 2024

See all articles by Chengneng Jin

Chengneng Jin

Shanghai University of Finance and Economics - School of Information Management and Engineering

Weiping Wu

Fuzhou University - School of Economics and Management

Jinyan Xie

Shanghai University of Finance and Economics

Date Written: May 1, 2024

Abstract

Investors are increasingly interested in incorporating environmental, social, and governance (ESG) considerations into their investment process. However, most studies on incorporating ESG in portfolio choice have focused on static settings, resulting in a simple buy-and-hold approach. This research aims to address this limitation by examining two categories of dynamic portfolio optimization problems with responsible investing: multi-period ESG-adjusted mean-variance (MV) portfolio optimization and multi-period ESG-adjusted MV hybrid portfolio optimization. In this paper, the Conditional Value at Risk (CVaR) is used as an additional risk measure of the hybrid model, while a variety of risk measures can be utilized. In the first model, we derive the semi-analytical optimal portfolio policy for this class of problems by leveraging the state separation property inherent in its structure. Our analysis reveals that the optimal portfolio policy is a piecewise affine function of the wealth and can be efficiently computed offline by solving two coupled equations. In the second model, we introduce an alternative approach called the Progressive Hedging Algorithm (PHA) to solve the problem and propose two algorithms, one with guaranteed convergence and the other practical efficiency. Through the use of examples, we demonstrate that our dynamic models outperform static models in terms of portfolio performance. In comparison to the traditional dynamic MV model, our model can effectively meet the requirements of ESG factors.

Keywords: Mean-Variance Portfolio Selection, Dynamic Portfolio Optimization, Progressive Hedging Algorithm, ESG, Conditional Value-at-Risk

Suggested Citation

Jin, Chengneng and Wu, Weiping and Xie, Jinyan, Responsible Investing: A Multi-period Portfolio Selection Model (May 1, 2024). Available at SSRN: https://ssrn.com/abstract=4814019 or http://dx.doi.org/10.2139/ssrn.4814019

Chengneng Jin

Shanghai University of Finance and Economics - School of Information Management and Engineering ( email )

No. 100 Wudong Road
Shanghai, Shanghai 200433
China

Weiping Wu (Contact Author)

Fuzhou University - School of Economics and Management ( email )

No. 2, Xueyuan Road, New District
No. 2, Xueyuan Road, New District
Fuzhou, Fujian 350108
China

Jinyan Xie

Shanghai University of Finance and Economics ( email )

NO. 777 Guoding Road
Shanghai, 200433
China

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