ESG portfolio for TDFs with time‐varying higher moments and cardinality constraint

• DOI: 10.1111/itor.13364
• Publication Date: 2023-09-07T04:55:58Z
• Authors: Wenling Liu; Kui Jing
• Keywords: Cardinality (data modeling); Kurtosis; Investment

Abstract Pension funds are crucial in supporting environmentally sustainable and socially responsible investments. This paper focuses on an essential product of pension funds, target date (TDFs), constructing its portfolio model that considers environmental, social, governance (ESG) investment. Our utilizes the mean–variance–skewness–kurtosis optimization framework accounts for time‐varying relationship between realized higher moments subsequent TDFs performance. A cardinality constraint is included to prevent over‐diversification reduce costs, controlling number constituent TDFs. Since multiobjective, we transform it into a single‐objective through investment manager's preferences. The numerical experiments represent most suitable moment strategy Chinese market demonstrate model's applicability managers prioritizing risk over returns, which resonates well with conservative funds. We prove advantageous improving TDFs' By selecting ESG as underlying assets, highlight green have better long‐term performance terms risk.