The Financial Market of Indices of Socioeconomic Well-Being

Abstract

This study discusses how financial economic theory and its quantitative tools can be applied to create socioeconomic indices and develop a financial market for the so-called “socioeconomic well-being indices”. In this study, we quantify socioeconomic well-being by assigning a dollar value to the well-being factors of selected countries; this is analogous to how the Dow 30 encapsulates the financial health of the US market. While environmental, social, and governance (ESG) financial markets address socioeconomic issues, our focus is broader, encompassing national citizens’ well-being. The dollar-denominated socioeconomic indices for each country can be viewed as financial assets that can serve as risky assets for constructing a global index, which, in turn, serves as a “market of well-being socioeconomic index”. This novel global index of well-being, paralleling the Dow Jones Industrial Average (DJIA), provides a comprehensive representation of the world’s socioeconomic status. Through advanced financial econometrics and dynamic asset pricing methodologies, we evaluate the potential for significant downturns in both the socioeconomic well-being indices of individual countries and the aggregate global index. This innovative approach allows us to engineer financial instruments akin to portfolio insurance, such as index puts, designed to hedge against these downturn risks. Our findings propose a financial market model for well-being indices, encouraging the financial industry to adopt and trade these indices as mechanisms to manage and hedge against downturn risks in well-being.

Description

© 2024 by the authors. cc-by

Keywords

dynamic asset pricing theory, financial econometric modeling, global dollar socioeconomic well-being index, gross domestic product, socioeconomic well-being indices, world development socioeconomic indicators

Citation

Mahanama, T.V., Shirvani, A., Rachev, S., & Fabozzi, F.J.. 2024. The Financial Market of Indices of Socioeconomic Well-Being. Journal of Risk and Financial Management, 17(1). https://doi.org/10.3390/jrfm17010035

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