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arXiv · 2401.14761

ESG driven pairs algorithm for sustainable trading: Analysis from the Indian market

Eeshaan Dutta·Sarthak Diwan·Siddhartha P. Chakrabarty
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Abstract

This paper proposes an algorithmic trading framework integrating Environmental, Social, and Governance (ESG) ratings with a pairs trading strategy. It addresses the demand for socially responsible investment solutions by developing a unique algorithm blending ESG data with methods for identifying co-integrated stocks. This allows selecting profitable pairs adhering to ESG principles. Further, it incorporates technical indicators for optimal trade execution within this sustainability framework. Extensive back-testing provides evidence of the model's effectiveness, consistently generating positive returns exceeding conventional pairs trading strategies, while upholding ESG principles. This paves the way for a transformative approach to algorithmic trading, offering insights for investors, policymakers, and academics.

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Eeshaan Dutta, Sarthak Diwan, Siddhartha P. Chakrabarty. 2024-01-26. ESG driven pairs algorithm for sustainable trading: Analysis from the Indian market. https://arxiv.org/abs/2401.14761

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