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on Computational Economics |
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Issue of 2008‒01‒26
three papers chosen by |
| By: | Thiemo Krink; Sandra Paterlini |
| Abstract: | Financial portfolio optimization is a challenging problem. First, the problem is multiobjective (i.e.: minimize risk and maximize profit) and the objective functions are often multimodal and non smooth (e.g.: value at risk). Second, managers have often to face real-world constraints, which are typically non-linear. Hence, conventional optimization techniques, such as quadratic programming, cannot be used. Stochastic search heuristic can be an attractive alternative. In this paper, we propose a new multiobjective algorithm for portfolio optimization: DEMPO - Differential Evolution for Multiobjective Portfolio Optimization. The main advantage of this new algorithm is its generality, i.e., the ability to tackle a portfolio optimization task as it is, without simplifications. Our empirical results show the capability of our approach of obtaining highly accurate results in very reasonable runtime, in comparison with quadratic programming and another state-of-art search heuristic, the so-called NSGA II. |
| Keywords: | Portfolio optimization; multiobjective; real world constraints; value at risk; expected shortfall; differential evolution |
| JEL: | G11 C61 D81 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:mod:wcefin:08012&r=cmp |
| By: | Nikos Thomaidis; Timotheos Angelidis; Vassilios Vassiliadis; Georgios Dounias |
| Abstract: | This paper considers the task of forming a portfolio of assets that outperforms a benchmark index, while imposing a constraint on the tracking error volatility. We examine three alternative formulations of active portfolio management. The first one is a typical set up in which the fund manager myopically maximizes excess return. The second formulation is an attempt to set a limit on the total risk exposure of the portfolio by adding a constraint that forces a priori the risk of the portfolio to be equal to the benchmark’s. The third formulation, presented in this paper, directly maximizes the efficiency of active portfolios, while setting a limit on the maximum tracking error variance. In determining optimal active portfolios, we incorporate additional constraints on the optimization problem, such as a limit on the maximum number of assets included in the portfolio (i.e. the cardinality of the portfolio) as well as upper and lower bounds on asset weights. From a computational point of view, the incorporation of these complex, though realistic, constraints becomes a challenge for traditional numeric optimization methods, especially when one has to assemble a portfolio from a big universe of assets. To deal properly with the complexity and the “roughness” of the solution space, we use particle swarm optimization, a population-based evolutionary technique. As an application, we select portfolios of different cardinality that actively reproduce the performance of the FTSE/ATHEX 20 Index of the Athens Stock Exchange. Our empirical study reveals important results as concerns the efficiency of common practices in active portfolio management and the incorporation of cardinality constraints. |
| Keywords: | Active portfolio management; tracking error; particle swarm optimization. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:uop:wpaper:0016&r=cmp |
| By: | Céline Rochon; Maral Shamloo; Andrew Feltenstein |
| Abstract: | This paper analyzes certain policies that are typical of a number of rapidly growing East Asian countries in which a fixed exchange rate, combined with a surplus labor market, has made domestic assets relatively inexpensive, generating high rates of FDI as well as domestic capital formation. This "investment hunger" can lead to unanticipated declines in the returns to investment, and resulting financial insolvencies. Private consumption remains low and there are concerns that high savings rates cannot be sustained. We construct a dynamic general equilibrium model and apply it to a stylized Asian economy, loosely based upon China. We calibrate a benchmark equilibrium, and carry out various counterfactual simulations to analyze alternative policies, in particular tax cuts and exchange rate revaluations, as instruments in increasing private consumption while avoiding bank failures. |
| Keywords: | Economic growth , China, People's Republic of , Consumption , Financial crisis , Exchange rates , Labor markets , |
| Date: | 2007–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/278&r=cmp |