Inclusion of ESG Ratings in Option Pricing

W. Brent Lindquist, Svetlozar T. Rachev, Yuan Hu, Abootaleb Shirvani

Research output: Chapter in Book/Report/Conference proceedingChapterpeer-review

Abstract

This chapter develops ESG-valued option pricing to reflect both the financial and ESG worth of the underlying asset. In contrast to Chap. 12, this chapter develops the theory of ESG-valued option pricing using binomial trees employing discrete (rather than continuous) ESG-valued returns. Call option prices are developed using different domestic REIT tangent portfolios as the underlying and their values compared under changes of the ESG affinity parameter. Standard implied volatility surfaces are also derived from the computed call option prices and examined under changing values of the affinity parameter. The discrete option pricing framework enables the incorporation of microeconomic features such as the presence of informed traders, and assessment of option trader views on spot market direction.

Original languageEnglish
Title of host publicationDynamic Modeling and Econometrics in Economics and Finance
PublisherSpringer Science and Business Media Deutschland GmbH
Pages247-258
Number of pages12
DOIs
StatePublished - 2022

Publication series

NameDynamic Modeling and Econometrics in Economics and Finance
Volume30
ISSN (Print)1566-0419
ISSN (Electronic)2363-8370

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