2025/11/26 by Aviv Alpern, Svetlozar T. Rachev, Alpern, Aviv +1
Decision Sciences · Economics, Econometrics and Finance · #Computational Finance (q-fin.CP) #FOS: Economics and business #Financial Markets and Investment Strategies #Financial Risk and Volatility Modeling #Portfolio Management (q-fin.PM) #Risk and Portfolio Optimization
paper · pdf · doi:10.48550/arxiv.2511.21850
openalex publication_date 2025/11/26 · openalex created_date 2025/12/03 · openalex updated_date 2026/07/28
We introduce a simple portfolio optimization strategy using ESG data with the Black-Litterman allocation framework. ESG scores are used as a bias for Stein shrinkage estimation of equilibrium risk premiums used in assigning Black-Litterman asset weights. Assets are modeled as multivariate affine normal-inverse Gaussian variables using CVaR as a risk measure. This strategy, though very simple, when employed with a soft turnover constraint is exceptionally successful. Portfolios are reallocated daily over a 4.7 year period, each with a different set of hyperparameters used for optimization. The most successful strategies have returns of approximately 40-45% annually.