Krassimir Kostadinov, who writes the blog My 2 cents tips, is now offering $50 in a contest to those offering the best advice to improve his paper, Modeling Responsible Investment with Extreme Value Mathematics in the Context of Modern Portfolio Theory. Finally, something productive you may be able to over your lunch hour if you have much stronger math skills than I do. From the paper’s abstract:
Modern Portfolio Theory (MPT), as developed by Markowitz in the middle of the last century, is a mathematical formulation of the concept of diversification in investing. An important success factor for the theory was the fact that it turned the hard and pretty much philosophical question of selecting an optimal investment portfolio into an easily tractable problem of linear algebra.
The MPT and its follow-up applications have drawn a significant amount of criticism over the last decades. This includes but is not limited to the emergence and development of whole new scientific fields & ideas like behavioral finance (e.g. Daniel et. al.), statistical modeling of extreme events (e.g. Embrechts et al.) and, more recently, the universal owner hypothesis (e.g. Monks and Minow).
In this paper we aim to create a bridge between the field of statistical modeling of extreme events (which is purely based on mathematics & probability theory) and the field of sustainable (or responsible) investments (which is largely considering business & economic reasoning). We suggest a new quantitative measure for portfolio management. We give arguments why and how to apply this measure to integrate environmental, social and governance (ESG) factors into the process. The measure is based on credit risk mathematics and enables quantification of the impact of global shocks affecting multiple asset classes (e.g. water shortages, strict environmental legislation, etc.).
See Kostadinov’s posts, Bridge portfolio mathematics and responsible investment and An application of the law of small numbers. I’d love to see you win $50 from Kostadinov and for him to win the IRRC Institute Research Award: Post-Modern Portfolio Theory (deadline already passed).