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A Game-Theoretical Integrated Approach for Sustainable Portfolio Selection: An Application on BIST Participation Sustainability Index Stocks

Year 2024, Volume: 7 Issue: 3, 457 - 464, 15.05.2024

Furkan Göktaş

https://doi.org/10.34248/bsengineering.1403554

Abstract

Sustainable investment is a hot topic of portfolio selection. This study aims to examine sustainable portfolio selection for conservative investors using the ESG criteria. Thus, we propose a two-stage integrated approach based on two-player zero-sum games. In the first stage, we use a fuzzy multi-criteria decision making (MCDM) approach to calculate the sustainability scores of the stocks based on expert knowledge. In the second stage, we form and solve a linear optimization problem by only adding a sustainability constraint to Young’s minimax portfolio selection model. We illustrate the integrated approach using the weekly simple returns of eight stocks. We also compare our results with the results of Young’s minimax portfolio selection model. We find that sustainable investment does not necessarily lead to performance loss. Furthermore, it may increase performance in some cases. To the best of our knowledge, this is the first paper on sustainable portfolio selection that depends only on two-player zero-sum games, including the stage of finding sustainability scores.

Keywords

Fuzzy set Game theory Multi-criteria decision making Participation index Portfolio selection Sustainability

References

  • Ballestero E, Bravo M, Pérez-Gladish B, Arenas-Parra M, Pla-Santamaria D. 2012. Socially responsible investment: A multicriteria approach to portfolio selection combining ethical and financial objectives. Eur J Oper Res, 216(2): 487-494.
  • Bilbao-Terol A, Arenas-Parra M, Cañal-Fernández V, Obam-Eyang PN. 2018. Multi-criteria analysis of the GRI sustainability reports: an application to socially responsible investment. J Oper Res Soc, 69(10): 1576-1598.
  • Calvo C, Ivorra C, Liern V. 2016. Fuzzy portfolio selection with non-financial goals: exploring the efficient frontier. Annals Operat Res, 245(1-2): 31-46.
  • Carlsson C, Fullér R, Majlender P. 2002. A possibilistic approach to selecting portfolios with highest utility score. Fuzzy Sets Syst, 131(1): 13-21.
  • Chen YW, Larbani M. 2006. Two-person zero-sum game approach for fuzzy multiple attribute decision making problems. Fuzzy Sets Syst, 157(1): 34-51.
  • Chu TC, Lin Y. 2009. An extension to fuzzy MCDM. Comput Math with Appl, 57(3): 445-454.
  • Ding Y. 2006. Portfolio selection under maximum minimum criterion. Qual Quant, 40(3): 457-468.
  • Garlappi L, Uppal R, Wang T. 2006. Portfolio selection with parameter and model uncertainty: A multi-prior approach. Rev Financ Stud, 20(1): 41-81.
  • Gasser SM, Rammerstorfer M, Weinmayer K. 2017. Markowitz revisited: social portfolio engineering. Eur J Oper Res, 258(3): 1181-1190.
  • Göktaş F, Gökerik M. 2024. Sosyal medya reklam platformu seçimi üzerine yeni bir oyun - teorik yaklaşım. J Turkish Operat Manage, in-press.
  • Goldfarb D, Iyengar G. 2003. Robust portfolio selection problems. Math Operat Res, 28(1): 1-38.
  • Hanine Y, Lamrani Alaoui Y, Tkiouat M, Lahrichi Y. 2021. Socially responsible portfolio selection: an interactive intuitionistic fuzzy approach. Mathematics, 9(23): 3023.
  • Hilario-Caballero A, Garcia-Bernabeu A, Salcedo JV, Vercher M. 2020. Tri-criterion model for constructing low-carbon mutual fund portfolios: A preference-based multi-objective genetic algorithm approach. Int J Environ Res Public Health, 17(17): 6324.
  • Jorion P. 1986. Bayes-Stein estimation for portfolio analysis. J Financial Quant Anal, 21(3): 279-292.
  • Kalayci CB, Ertenlice O, Akbay MA. 2019. A comprehensive review of deterministic models and applications for mean-variance portfolio optimization. Expert Syst Appl, 125: 345-368.
  • Markowitz H. 1952. Portfolio selection. J Finance, 7(1): 77-91.
  • McKeown R, Hopkins C, Rizzi R, Chrystalbride M. 2002. Education for sustainable development toolkit. Knoxville: Energy, Environment and Resources Center, University of Tennessee, Knoxville, US, pp: 1-142.
  • Ok Ş. 2022. Activity based costing and budgeting based on carbon accounting: Application in a manufacturing business. PhD Thesis, Karabük University, Graduate Education Institute, Karabük, Türkiye, pp: 294.
  • Pedersen LH, Fitzgibbons S, Pomorski L. 2021. Responsible investing: the ESG-efficient frontier. J Financ Econ, 142(2): 572-597.
  • Qi Y, Li X. 2020. On imposing ESG constraints of portfolio selection for sustainable investment and comparing the efficient frontiers in the weight space. Sage Open, 10(4): 2158244020975070.
  • Raghavan TES. 1994. Zero-sum two-person games. Handbook Game Theory Econ Appl, 2: 735-768.
  • Refinitiv 2023. Environmental, Social and Governance (ESG) scores from LSEG. URL: https://www.lseg.com/content/dam/data-analytics/en_us/documents/methodology/lseg-esg-scores methodology.pdf (accessed date: Jan 15, 2024).
  • Sikalo M, Arnaut-Berilo A, Zaimovic A. 2022. Efficient asset allocation: Application of game theory-based model for superior performance. Int J Finan Stud, 10(1): 20.
  • Şişman ME, Çankaya S. 2021. The effect of environmental, social and corporate governance (ESG) data on the financial performance of firms: A study on the airline industry. Çukurova Üniv İİBF Derg, 25(1): 73-91.
  • Staub-Bisnang M. 2012. Sustainable investing for institutional investors - risks, regulations and strategies. John Wiley & Sons, New York, US, pp: 256.
  • Steuer RE, Utz S. 2023. Non-contour efficient fronts for identifying most preferred portfolios in sustainability investing. Eur J Oper Res, 306(2): 742-753.
  • Tütüncü RH, Koenig M. 2004. Robust asset allocation. Annals Operat Res, 132: 157-187.
  • Utz S, Wimmer M, Hirschberger M, Steuer RE. 2014. Tri-criterion inverse portfolio optimization with application to socially responsible mutual funds. Eur J Oper Res, 234(2): 491-498.
  • Utz S, Wimmer M, Steuer RE. 2015. Tri-criterion modeling for constructing more-sustainable mutual funds. Eur J Oper Res, 246(1): 331-338
  • Xidonas P, Essner E. 2022. On ESG portfolio construction: A multi-objective optimization approach. Comput Econ, 2022: 1-25.
  • Yadav S, Kumar A, Mehlawat MK, Gupta P, Charles V. 2023. A multi-objective sustainable financial portfolio selection approach under an intuitionistic fuzzy framework. Inf Sci, 646: 119379.
  • Young MR. 1998. A minimax portfolio selection rule with linear programming solution. Manage Sci, 44(5): 673-683.

A Game-Theoretical Integrated Approach for Sustainable Portfolio Selection: An Application on BIST Participation Sustainability Index Stocks

Year 2024, Volume: 7 Issue: 3, 457 - 464, 15.05.2024

Furkan Göktaş

https://doi.org/10.34248/bsengineering.1403554

Abstract

Sustainable investment is a hot topic of portfolio selection. This study aims to examine sustainable portfolio selection for conservative investors using the ESG criteria. Thus, we propose a two-stage integrated approach based on two-player zero-sum games. In the first stage, we use a fuzzy multi-criteria decision making (MCDM) approach to calculate the sustainability scores of the stocks based on expert knowledge. In the second stage, we form and solve a linear optimization problem by only adding a sustainability constraint to Young’s minimax portfolio selection model. We illustrate the integrated approach using the weekly simple returns of eight stocks. We also compare our results with the results of Young’s minimax portfolio selection model. We find that sustainable investment does not necessarily lead to performance loss. Furthermore, it may increase performance in some cases. To the best of our knowledge, this is the first paper on sustainable portfolio selection that depends only on two-player zero-sum games, including the stage of finding sustainability scores.

Keywords

Fuzzy set Game theory Multi-criteria decision making Participation index Portfolio selection Sustainability

References

  • Ballestero E, Bravo M, Pérez-Gladish B, Arenas-Parra M, Pla-Santamaria D. 2012. Socially responsible investment: A multicriteria approach to portfolio selection combining ethical and financial objectives. Eur J Oper Res, 216(2): 487-494.
  • Bilbao-Terol A, Arenas-Parra M, Cañal-Fernández V, Obam-Eyang PN. 2018. Multi-criteria analysis of the GRI sustainability reports: an application to socially responsible investment. J Oper Res Soc, 69(10): 1576-1598.
  • Calvo C, Ivorra C, Liern V. 2016. Fuzzy portfolio selection with non-financial goals: exploring the efficient frontier. Annals Operat Res, 245(1-2): 31-46.
  • Carlsson C, Fullér R, Majlender P. 2002. A possibilistic approach to selecting portfolios with highest utility score. Fuzzy Sets Syst, 131(1): 13-21.
  • Chen YW, Larbani M. 2006. Two-person zero-sum game approach for fuzzy multiple attribute decision making problems. Fuzzy Sets Syst, 157(1): 34-51.
  • Chu TC, Lin Y. 2009. An extension to fuzzy MCDM. Comput Math with Appl, 57(3): 445-454.
  • Ding Y. 2006. Portfolio selection under maximum minimum criterion. Qual Quant, 40(3): 457-468.
  • Garlappi L, Uppal R, Wang T. 2006. Portfolio selection with parameter and model uncertainty: A multi-prior approach. Rev Financ Stud, 20(1): 41-81.
  • Gasser SM, Rammerstorfer M, Weinmayer K. 2017. Markowitz revisited: social portfolio engineering. Eur J Oper Res, 258(3): 1181-1190.
  • Göktaş F, Gökerik M. 2024. Sosyal medya reklam platformu seçimi üzerine yeni bir oyun - teorik yaklaşım. J Turkish Operat Manage, in-press.
  • Goldfarb D, Iyengar G. 2003. Robust portfolio selection problems. Math Operat Res, 28(1): 1-38.
  • Hanine Y, Lamrani Alaoui Y, Tkiouat M, Lahrichi Y. 2021. Socially responsible portfolio selection: an interactive intuitionistic fuzzy approach. Mathematics, 9(23): 3023.
  • Hilario-Caballero A, Garcia-Bernabeu A, Salcedo JV, Vercher M. 2020. Tri-criterion model for constructing low-carbon mutual fund portfolios: A preference-based multi-objective genetic algorithm approach. Int J Environ Res Public Health, 17(17): 6324.
  • Jorion P. 1986. Bayes-Stein estimation for portfolio analysis. J Financial Quant Anal, 21(3): 279-292.
  • Kalayci CB, Ertenlice O, Akbay MA. 2019. A comprehensive review of deterministic models and applications for mean-variance portfolio optimization. Expert Syst Appl, 125: 345-368.
  • Markowitz H. 1952. Portfolio selection. J Finance, 7(1): 77-91.
  • McKeown R, Hopkins C, Rizzi R, Chrystalbride M. 2002. Education for sustainable development toolkit. Knoxville: Energy, Environment and Resources Center, University of Tennessee, Knoxville, US, pp: 1-142.
  • Ok Ş. 2022. Activity based costing and budgeting based on carbon accounting: Application in a manufacturing business. PhD Thesis, Karabük University, Graduate Education Institute, Karabük, Türkiye, pp: 294.
  • Pedersen LH, Fitzgibbons S, Pomorski L. 2021. Responsible investing: the ESG-efficient frontier. J Financ Econ, 142(2): 572-597.
  • Qi Y, Li X. 2020. On imposing ESG constraints of portfolio selection for sustainable investment and comparing the efficient frontiers in the weight space. Sage Open, 10(4): 2158244020975070.
  • Raghavan TES. 1994. Zero-sum two-person games. Handbook Game Theory Econ Appl, 2: 735-768.
  • Refinitiv 2023. Environmental, Social and Governance (ESG) scores from LSEG. URL: https://www.lseg.com/content/dam/data-analytics/en_us/documents/methodology/lseg-esg-scores methodology.pdf (accessed date: Jan 15, 2024).
  • Sikalo M, Arnaut-Berilo A, Zaimovic A. 2022. Efficient asset allocation: Application of game theory-based model for superior performance. Int J Finan Stud, 10(1): 20.
  • Şişman ME, Çankaya S. 2021. The effect of environmental, social and corporate governance (ESG) data on the financial performance of firms: A study on the airline industry. Çukurova Üniv İİBF Derg, 25(1): 73-91.
  • Staub-Bisnang M. 2012. Sustainable investing for institutional investors - risks, regulations and strategies. John Wiley & Sons, New York, US, pp: 256.
  • Steuer RE, Utz S. 2023. Non-contour efficient fronts for identifying most preferred portfolios in sustainability investing. Eur J Oper Res, 306(2): 742-753.
  • Tütüncü RH, Koenig M. 2004. Robust asset allocation. Annals Operat Res, 132: 157-187.
  • Utz S, Wimmer M, Hirschberger M, Steuer RE. 2014. Tri-criterion inverse portfolio optimization with application to socially responsible mutual funds. Eur J Oper Res, 234(2): 491-498.
  • Utz S, Wimmer M, Steuer RE. 2015. Tri-criterion modeling for constructing more-sustainable mutual funds. Eur J Oper Res, 246(1): 331-338
  • Xidonas P, Essner E. 2022. On ESG portfolio construction: A multi-objective optimization approach. Comput Econ, 2022: 1-25.
  • Yadav S, Kumar A, Mehlawat MK, Gupta P, Charles V. 2023. A multi-objective sustainable financial portfolio selection approach under an intuitionistic fuzzy framework. Inf Sci, 646: 119379.
  • Young MR. 1998. A minimax portfolio selection rule with linear programming solution. Manage Sci, 44(5): 673-683.
There are 32 citations in total.

Details

Primary Language English
Subjects Quantitative Decision Methods , Multiple Criteria Decision Making
Journal Section Research Articles
Authors

Furkan Göktaş 0000-0001-9291-3912

Publication Date May 15, 2024
Submission Date December 12, 2023
Acceptance Date April 7, 2024
Published in Issue Year 2024 Volume: 7 Issue: 3

Cite

APA Göktaş, F. (2024). A Game-Theoretical Integrated Approach for Sustainable Portfolio Selection: An Application on BIST Participation Sustainability Index Stocks. Black Sea Journal of Engineering and Science, 7(3), 457-464. https://doi.org/10.34248/bsengineering.1403554
AMA Göktaş F. A Game-Theoretical Integrated Approach for Sustainable Portfolio Selection: An Application on BIST Participation Sustainability Index Stocks. BSJ Eng. Sci. May 2024;7(3):457-464. doi:10.34248/bsengineering.1403554
Chicago Göktaş, Furkan. “A Game-Theoretical Integrated Approach for Sustainable Portfolio Selection: An Application on BIST Participation Sustainability Index Stocks”. Black Sea Journal of Engineering and Science 7, no. 3 (May 2024): 457-64. https://doi.org/10.34248/bsengineering.1403554.
EndNote Göktaş F (May 1, 2024) A Game-Theoretical Integrated Approach for Sustainable Portfolio Selection: An Application on BIST Participation Sustainability Index Stocks. Black Sea Journal of Engineering and Science 7 3 457–464.
IEEE F. Göktaş, “A Game-Theoretical Integrated Approach for Sustainable Portfolio Selection: An Application on BIST Participation Sustainability Index Stocks”, BSJ Eng. Sci., vol. 7, no. 3, pp. 457–464, 2024, doi: 10.34248/bsengineering.1403554.
ISNAD Göktaş, Furkan. “A Game-Theoretical Integrated Approach for Sustainable Portfolio Selection: An Application on BIST Participation Sustainability Index Stocks”. Black Sea Journal of Engineering and Science 7/3 (May 2024), 457-464. https://doi.org/10.34248/bsengineering.1403554.
JAMA Göktaş F. A Game-Theoretical Integrated Approach for Sustainable Portfolio Selection: An Application on BIST Participation Sustainability Index Stocks. BSJ Eng. Sci. 2024;7:457–464.
MLA Göktaş, Furkan. “A Game-Theoretical Integrated Approach for Sustainable Portfolio Selection: An Application on BIST Participation Sustainability Index Stocks”. Black Sea Journal of Engineering and Science, vol. 7, no. 3, 2024, pp. 457-64, doi:10.34248/bsengineering.1403554.
Vancouver Göktaş F. A Game-Theoretical Integrated Approach for Sustainable Portfolio Selection: An Application on BIST Participation Sustainability Index Stocks. BSJ Eng. Sci. 2024;7(3):457-64.
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