The Financial Market of Indices of Socioeconomic Wellbeing

Paper: arXiv 2303.05654

Authors: Thilini V. Mahanama, Abootaleb Shirvani, Svetlozar Rachev

Abstract

The financial industry should be involved in mitigating the risk of downturns in the financial wellbeing indices around the world by implementing well-developed financial tools such as insurance instruments on the underlying wellbeing indices. We define a new quantitative measure of the wellbeing of a country’s population for those countries using the world development indicators provided by the World Bank. We monetize the indices of socioeconomic wellbeing, which serve as “risky assets,” and consequently develop a global financial market for them, which serves as a “market of indices of socioeconomic wellbeing.” Then, we compare the wellbeing of different countries using financial econometric analysis and dynamic asset pricing theory. We provide the optimal portfolio weight composition along with the efficient frontiers of the wellbeing socioeconomic indices with different risk-return measures. We derive insurance instruments, such as put options, which allow the financial industry to monitor, manage, and trade these indices, creating the funds for insurance against adverse movements of those indices. Our findings should help financial institutions to incorporate socioeconomic issues as an additional dimension to their “two-dimensional” risk-return adjusted optimal financial portfolios.

Complexity vs Empirical Score

• Math Complexity: 6.5/10
• Empirical Rigor: 5.0/10
• Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper introduces an innovative framework to monetize World Bank wellbeing indices and trade them using option pricing and Modern Portfolio Theory. While the theoretical application of financial math to macroeconomic indicators is highly novel, the empirical implementation relies on constructed indices that lack traditional market liquidity and validation.

Research Flowchart

  flowchart TD
    A[Research Goal: Mitigate Socioeconomic Wellbeing Risk via Financial Markets] --> B[Data Input: World Bank World Development Indicators WDI]
    B --> C[Construct & Monetize Socioeconomic Wellbeing Indices as Risky Assets]
    C --> D[Apply Dynamic Asset Pricing & Financial Econometrics]
    D --> E[Derive Put Option Insurance Instruments for Risk Management]
    D --> F[Calculate Efficient Frontiers & Optimal Portfolio Weights]
    E --> G[Outcome: 3D Portfolio Allocation Integrating Socioeconomic Risk]
    F --> G