IDEAS home Printed from https://ideas.repec.org/p/pia/wpaper/84-2011.html
   My bibliography  Save this paper

The cost of sustainability on optimal portfolio choices

Author

Listed:
  • Stefano Herzel
  • Marco Nicolosi
  • Catalin Starica

Abstract

We examine the impact of including sustainability related constraints on optimal portfolio selection. Our analysis covers an investment set containing the components of the S&P500 index from 1993 to 2008. The optimizations are performed according to the classical mean-variance approach while sustainability constraints are introduced by eliminating from the investment pool those assets that do not comply to given social responsibility criteria (screening). We compare the efficient frontiers with and without screening. The analysis is performed on the three main dimensions of sustainability, namely Environmental, Social and Governance. We find that socially responsible screening implies a small loss in terms of Sharpe Ratio even though it has a strong impact on the market capitalization of the optimal port-folio. The spanning test shows that the ex-post differences between the two frontiers, when short selling is not allowed, are significant only in the case of Environmental screening

Suggested Citation

  • Stefano Herzel & Marco Nicolosi & Catalin Starica, 2011. "The cost of sustainability on optimal portfolio choices," Quaderni del Dipartimento di Economia, Finanza e Statistica 84/2011, Università di Perugia, Dipartimento Economia.
  • Handle: RePEc:pia:wpaper:84/2011
    as

    Download full text from publisher

    File URL: http://www.ec.unipg.it/DEFS/uploads/qd_84_web.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Luca Pieroni & Fabrizio Pompei, 2008. "Evaluating innovation and labour market relationships: the case of Italy," Cambridge Journal of Economics, Oxford University Press, vol. 32(2), pages 325-347, March.
    3. Pieroni, Luca & Ricciarelli, Matteo, 2008. "Modelling dynamic storage function in commodity markets: Theory and evidence," Economic Modelling, Elsevier, vol. 25(5), pages 1080-1092, September.
    4. Ledoit, Oliver & Wolf, Michael, 2008. "Robust performance hypothesis testing with the Sharpe ratio," Journal of Empirical Finance, Elsevier, vol. 15(5), pages 850-859, December.
    5. David Aristei & Federico Perali & Luca Pieroni, 2008. "Cohort, age and time effects in alcohol consumption by Italian households: a double-hurdle approach," Empirical Economics, Springer, vol. 35(1), pages 29-61, August.
    6. Davide Castellani & Fabio Pieri, 2011. "Foreign Investments and Productivity Evidence from European Regions," Quaderni del Dipartimento di Economia, Finanza e Statistica 83/2011, Università di Perugia, Dipartimento Economia.
    7. Cristiano Perugini & Gaetano Martino, 2008. "Income Inequality Within European Regions: Determinants And Effects On Growth," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 54(3), pages 373-406, September.
    8. Bruno Bracalente & Cristiano Perugini, 2008. "Factor decomposition of cross-country income inequality with interaction effects," Quaderni del Dipartimento di Economia, Finanza e Statistica 54/2008, Università di Perugia, Dipartimento Economia.
    9. David Aristei & Luca Pieroni, 2008. "A double-hurdle approach to modelling tobacco consumption in Italy," Applied Economics, Taylor & Francis Journals, vol. 40(19), pages 2463-2476.
    10. Simona Bigerna & Paolo Polinori, 2010. "Ambiente operativo ed efficienza nel settore del trasporto pubblico locale in Italia," SCIENZE REGIONALI, FrancoAngeli Editore, vol. 2010(3), pages 85-118.
    11. Huberman, Gur & Kandel, Shmuel, 1987. " Mean-Variance Spanning," Journal of Finance, American Finance Association, vol. 42(4), pages 873-888, September.
    12. Basile, Roberto & Castellani, Davide & Zanfei, Antonello, 2008. "Location choices of multinational firms in Europe: The role of EU cohesion policy," Journal of International Economics, Elsevier, vol. 74(2), pages 328-340, March.
    13. Slawomir I. BUKOWSKI, 2006. "The Maastricht convergence criteria and economic growth in the EMU," Quaderni del Dipartimento di Economia, Finanza e Statistica 24/2006, Università di Perugia, Dipartimento Economia.
    14. Alessandra Righi & Dario Sciulli, 2009. "The Timing of the School-to-Permanent Work Transition: a Comparison across Ten European Countries," Quaderni del Dipartimento di Economia, Finanza e Statistica 65/2009, Università di Perugia, Dipartimento Economia.
    15. Arbia, Giuseppe & Battisti, Michele & Di Vaio, Gianfranco, 2010. "Institutions and geography: Empirical test of spatial growth models for European regions," Economic Modelling, Elsevier, vol. 27(1), pages 12-21, January.
    16. Abbritti, Mirko & Boitani, Andrea & Damiani, Mirella, 2006. "Unemployment, Inflation and Monetary Policy in a Dynamic New Keynesian Model with Hiring Costs," MPRA Paper 2252, University Library of Munich, Germany, revised Jan 2007.
    17. Luisa Franzini & Margherita Giannoni, 2009. "Determinants of Health Disparities in Italian Regions," Quaderni del Dipartimento di Economia, Finanza e Statistica 70/2009, Università di Perugia, Dipartimento Economia.
    18. Cristiano Perugini & Fabrizio Pompei & Marcello Signorelli, 2008. "FDI, R&D and human capital in Central and Eastern European countries," Post-Communist Economies, Taylor & Francis Journals, vol. 20(3), pages 317-345.
    19. Bruno Bracalente & Cristiano Perugini, 2010. "The components of regional disparities in Europe," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 44(3), pages 621-645, June.
    20. Misbah Tanveer Choudhry & Enrico Marelli & Marcello Signorelli, 2010. "The Impact of Financial Crises on Youth Unemployment Rate," Quaderni del Dipartimento di Economia, Finanza e Statistica 79/2010, Università di Perugia, Dipartimento Economia.
    21. PERUGINI, Cristiano, 2009. "Employment Intensity Of Growth In Italy. A Note Using Regional Data," Regional and Sectoral Economic Studies, Euro-American Association of Economic Development, vol. 9(1).
    22. Silvia Micheli, 2010. "Learning Curve and Wind Power," Quaderni del Dipartimento di Economia, Finanza e Statistica 81/2010, Università di Perugia, Dipartimento Economia.
    23. Nijman, T.E. & de Roon, F.A. & Werker, B.J.M., 2001. "Testing for Mean-Variance spanning with short sales constraints and transaction costs : The case of emerging markets," Other publications TiSEM f4a3551a-d7ae-4c22-8813-b, Tilburg University, School of Economics and Management.
    24. Antonela Finizia & Riccardo Magnani & Federico Perali & Paolo Polinori & Cristina Salvioni, 2005. "Construction and Simulation of the General Economic Equilibrium Model Meg-Ismea for the Italian Economy," Quaderni del Dipartimento di Economia, Finanza e Statistica 17/2005, Università di Perugia, Dipartimento Economia.
    25. Paolo Naticchioni & Andrea Ricci & Emiliano Rustichelli, 2007. "Wage Structure, Inequality And Skill-Biased Change: Is Italy An Outlier?," Quaderni del Dipartimento di Economia, Finanza e Statistica 38/2007, Università di Perugia, Dipartimento Economia.
    26. Simona Bigerna & Paolo Polinori, 2008. "The willingness to pay for Renewable Energy Sources (RES): the case of Italy with different survey approaches and under different EU “climate vision”. First results," Quaderni del Dipartimento di Economia, Finanza e Statistica 58/2008, Università di Perugia, Dipartimento Economia.
    27. Marcello Signorelli, 2005. "Growth and employment: comparative performance, convergences and co-movements," Quaderni del Dipartimento di Economia, Finanza e Statistica 08/2005, Università di Perugia, Dipartimento Economia.
    28. Boschi, Melisso & Pieroni, Luca, 2009. "Aluminium market and the macroeconomy," Journal of Policy Modeling, Elsevier, vol. 31(2), pages 189-207.
    29. David Aristei & Luca Pieroni, 2005. "Estimating the Role of Government Expenditure in Long-run Consumption," Quaderni del Dipartimento di Economia, Finanza e Statistica 13/2005, Università di Perugia, Dipartimento Economia.
    30. Marcello Signorelli, 2005. "Employment and policies in Europe: a regional perspective," Quaderni del Dipartimento di Economia, Finanza e Statistica 05/2005, Università di Perugia, Dipartimento Economia.
    31. Pieroni, Luca & d'Agostino, Giorgio & Lorusso, Marco, 2008. "Can we declare military Keynesianism dead?," Journal of Policy Modeling, Elsevier, vol. 30(5), pages 675-691.
    32. Luca Pieroni & Fabrizio Pompei, 2005. "Investimenti diretti esteri e innovazione in Umbria," Quaderni del Dipartimento di Economia, Finanza e Statistica 14/2005, Università di Perugia, Dipartimento Economia.
    33. Becchetti, Leonardo & Castriota, Stefano & Corrado, Luisa & Ricca, Elena Giachin, 2013. "Beyond the Joneses: Inter-country income comparisons and happiness," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 45(C), pages 187-195.
    34. Carlo Andrea Bollino & Paolo Polinori, 2005. "Gli incentivi agli investimenti: un’analisi dell’efficienza industriale su scala geografica regionale e sub regionale," Quaderni del Dipartimento di Economia, Finanza e Statistica 16/2005, Università di Perugia, Dipartimento Economia.
    35. Marcello Signorelli & Enrico Marelli, 2007. "Institutional change, regional features and aggregate performance in eight EU’s transition countries," Quaderni del Dipartimento di Economia, Finanza e Statistica 37/2007, Università di Perugia, Dipartimento Economia.
    36. Cristiano Perugini, 2008. "Employment and Unemployment in the Italian Provinces," Quaderni del Dipartimento di Economia, Finanza e Statistica 49/2008, Università di Perugia, Dipartimento Economia.
    37. Cristiano Perugini & Fabrizio Pompei, 2008. "Technological Change, Labour Demand and Income Distribution in European Union Countries," Quaderni del Dipartimento di Economia, Finanza e Statistica 56/2008, Università di Perugia, Dipartimento Economia.
    38. Slawomir Bukowski, 2008. "On the road to the euro zone. Currency rate stabilization: experiences of the selected EU countries," Quaderni del Dipartimento di Economia, Finanza e Statistica 50/2008, Università di Perugia, Dipartimento Economia.
    39. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    40. Cristiano Perugini & Marcello Signorelli, 2005. "Employment Differences, Convergences and Similarities in Italian Provinces," Quaderni del Dipartimento di Economia, Finanza e Statistica 07/2005, Università di Perugia, Dipartimento Economia.
    41. Bauer, Rob & Koedijk, Kees & Otten, Roger, 2005. "International evidence on ethical mutual fund performance and investment style," Journal of Banking & Finance, Elsevier, vol. 29(7), pages 1751-1767, July.
    42. Floro Ernesto Caroleo & Francesco Pastore, 2007. "The Youth Experience Gap: Explaining Differences across EU Countries," Quaderni del Dipartimento di Economia, Finanza e Statistica 41/2007, Università di Perugia, Dipartimento Economia.
    43. Frans A. de Roon, 2001. "Testing for Mean-Variance Spanning with Short Sales Constraints and Transaction Costs: The Case of Emerging Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 721-742, April.
    44. Roberto Basile, 2009. "Productivity Polarization across Regions in Europe," International Regional Science Review, , vol. 32(1), pages 92-115, January.
    45. Davide Castellani & Fabio Pieri, 2010. "The Effect of Foreign Investments on European Regional Productivity," Quaderni del Dipartimento di Economia, Finanza e Statistica 74/2010, Università di Perugia, Dipartimento Economia.
    46. Kodde, David A & Palm, Franz C, 1986. "Wald Criteria for Jointly Testing Equality and Inequality Restriction s," Econometrica, Econometric Society, vol. 54(5), pages 1243-1248, September.
    47. Carlo Andrea BOLLINO & Paolo POLINORI, 2005. "Il valore aggiunto su scala comunale: la Regione Umbria 2001-2003," Quaderni del Dipartimento di Economia, Finanza e Statistica 15/2005, Università di Perugia, Dipartimento Economia.
    48. de Roon, F.A. & Nijman, T.E. & Werker, B.J.M., 1998. "Testing for mean-variance spanning with short sales constraints and transaction costs : The case of emerging markets," Discussion Paper 1998-07, Tilburg University, Center for Economic Research.
    49. Gaetano Martino & Paolo Polinori, 2007. "Contracting Food Safety Strategies in Hybrid Governance Structures," Quaderni del Dipartimento di Economia, Finanza e Statistica 40/2007, Università di Perugia, Dipartimento Economia.
    50. Jobson, J D & Korkie, Bob M, 1981. "Performance Hypothesis Testing with the Sharpe and Treynor Measures," Journal of Finance, American Finance Association, vol. 36(4), pages 889-908, September.
    51. Luca Pieroni & Fabrizio Pompei, 2005. "Innovations and Labour Market Institutions: An Empirical Analysis of the Italian Case in the middle 90’s," Quaderni del Dipartimento di Economia, Finanza e Statistica 12/2005, Università di Perugia, Dipartimento Economia.
    52. Bruno Bracalente & Cristiano Perugini & Fabrizio Pompei, 2008. "Homogeneous, Urban Heterogeneous, or both? External Economies and Regional Manufacturing Productivity in Europe," Quaderni del Dipartimento di Economia, Finanza e Statistica 51/2008, Università di Perugia, Dipartimento Economia.
    53. Dario Sciulli & Marcello Signorelli, 2010. "University-to-work transitions: the case of Perugia," Quaderni del Dipartimento di Economia, Finanza e Statistica 77/2010, Università di Perugia, Dipartimento Economia.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Boudt, Kris & Cornelissen, Jonathan & Croux, Christophe, 2013. "The impact of a sustainability constraint on the mean-tracking error efficient frontier," Economics Letters, Elsevier, vol. 119(3), pages 255-260.
    2. Marco Nicolosi & Stefano Grassi & Elena Stanghellini, 2014. "Item response models to measure corporate social responsibility," Applied Financial Economics, Taylor & Francis Journals, vol. 24(22), pages 1449-1464, November.
    3. Damiani, Mirella & Pompei, Fabrizio & Ricci, Andrea, 2011. "Temporary job protection and productivity growth in EU economies," MPRA Paper 29698, University Library of Munich, Germany.
    4. Rodrigo Zeidan & Claudio Boechat & Angela Fleury, 2015. "Developing a Sustainability Credit Score System," Journal of Business Ethics, Springer, vol. 127(2), pages 283-296, March.
    5. Francesco Venturini, 2011. "Product variety, product quality, and evidence of Schumpeterian endogenous growth: a note," Quaderni del Dipartimento di Economia, Finanza e Statistica 93/2011, Università di Perugia, Dipartimento Economia.

    More about this item

    Keywords

    Socially responsible investments; optimal portfolios; screening.;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pia:wpaper:84/2011. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ubaldo Pizzoli). General contact details of provider: http://edirc.repec.org/data/deperit.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.