Probability Analysis of the Relationship Between Share Price and ESG Ratings in the Aerospace & Defense Industry

Probability Analysis of the Relationship Between Share Price and ESG Ratings in the Aerospace & Defense Industry

Presenter(s)

John Richard Coffey

Comments

Presentation: 3:00 p.m.-3:20 p.m., Kennedy Union 207

Description

ESG is an evolving niche in the financial markets, as investors attempt to identify the companies that best fit with their own values. Aerospace and Defense firms are under constant scrutiny for their involvement in global warfare and contributions to the airline industry, one of the most fuel-intensive industries outside of Oil and Gas. The objective of this research is to determine which metrics within ESG impact share prices for the Aerospace and Defense industry most and build a probability model to measure the potential impact ESG has on share price movement. ESG scores for individual metrics such as Air Quality and Energy Management in Environmental and Customer Welfare and Data Security in Social. Regressions were then run with the scores for each ESG metrics run against a firm’s share price to measure correlation. Correlation was generally weak across most metrics; metrics with above 50% correlation were chosen to develop the probability model. Highest correlation was found among Social metrics, likely explained by the social impact defense companies have on war torn countries. The correlations were used to build a conditional joint probability model that determined the likelihood that a change in share price was caused by changes in one of the key ESG scores. A probability was determined, however low correlations brought into question the accuracy of the model.

Publication Date

4-20-2022

Project Designation

Capstone Project

Primary Advisor

Ruihua Liu

Primary Advisor's Department

Mathematics

Keywords

Stander Symposium project, College of Arts and Sciences

United Nations Sustainable Development Goals

Affordable and Clean Energy; Decent Work and Economic Growth

Probability Analysis of the Relationship Between Share Price and ESG Ratings in the Aerospace & Defense Industry

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