Bachelier's Market Model for ESG Asset Pricing

Paper: arXiv 2306.04158

Authors: Svetlozar Rachev, Nancy Asare Nyarko, Blessing Omotade, Peter Yegon

Abstract

Environmental, Social, and Governance (ESG) finance is a cornerstone of modern finance and investment, as it changes the classical return-risk view of investment by incorporating an additional dimension of investment performance: the ESG score of the investment. We define the ESG price process and integrate it into an extension of Bachelier’s market model in both discrete and continuous time, enabling option pricing valuation.

Complexity vs Empirical Score

• Math Complexity: 6.5/10
• Empirical Rigor: 2.0/10
• Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper introduces a mathematically structured theoretical extension of Bachelier’s model to incorporate ESG price processes in discrete and continuous time. While mathematically solid and novel in its conceptual framing, it lacks empirical validation, backtesting, or real-market data application.

Research Flowchart

  flowchart TD
    A[Research Goal: Extend Bachelier Model<br>for ESG Option Pricing] --> B[Inputs: Traditional Risk-Return<br>& ESG Performance Score]
    B --> C[Define ESG-Adjusted<br>Price Process]
    C --> D[Develop Discrete & Continuous<br>Market Models]
    D --> E[Derive Option Pricing<br>Valuation Formulas]
    E --> F[Outcomes: 3D Asset Pricing Framework<br>& ESG Option Valuation]