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

TL;DR

This paper introduces an ESG-integrated pairs trading algorithm tailored for the Indian market, combining co-integration, technical indicators, and ESG ratings to promote sustainable investing with proven profitability.

Contribution

It presents a novel algorithm that merges ESG data with pairs trading strategies, enhancing sustainable investment options in algorithmic trading.

Findings

Consistently outperforms traditional pairs trading strategies

Generates positive returns while adhering to ESG principles

Effective in the Indian market context

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.