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.
@article{arxiv.2401.14761,
title = {ESG driven pairs algorithm for sustainable trading: Analysis from the Indian market},
author = {Eeshaan Dutta and Sarthak Diwan and Siddhartha P. Chakrabarty},
journal= {arXiv preprint arXiv:2401.14761},
year = {2024}
}