Multi objective evolutionary optimization in uncertain environments

Master'sMASTER OF ENGINEERIN

Doctor of Philosophy

dissertationThe shift from a domestic currency (peso) to dollar denominated deposits (deposit dollarization) in Argentina and Bolivia is explained with a nonlinear model that incorporates ratcheting effects, hysteresis and network externalities. There are two principal factors behind these effects: holding and transacting costs. The depreciation rate of a local currency versus an international monetary standard (peso versus dollar) is a reasonable proxy for the holding cost of the local currency. Strong depreciation of a currency imposes a substantial holding cost on its users and increases or "ratchets up" how high agents predict future depreciation rates will be. A transaction cost is incurred whenever an agent transacts outside his/her currency network of buyers and sellers. The model assumes there are two currency networks; one is based on the peso and the other on the dollar. A transaction network externality arises when relative returns or savings to using a given currency increase as the size of that currency's network of users expands. This externality makes the currency choice of an individual partially dependent on the choices others in his/her reference group or network make. Hysteresis, the persistence of high dollarization, happens when the expected holding cost of the dollar is less than the peso due to ratcheting effect, and/or converting back to the peso imposes a substantial transaction cost due to the large size of the dollar network. Under certain network dynamics and behavioral assumptions, dollarization levels can follow a nonlinear path to rest at an either high or low-equilibrium point. Resting at either high or low dollarization equilibria depends on the presence and location of an unstable third intermediate equilibrium point. A shock to the holding cost of at least one currency is needed to establish a new equilibrium position. For example, a spike in peso's depreciation ratchets up its expected holding cost and establishes a new nonlinear path that leads to higher dollarization equilibria, which the model expects the economy to start moving towards. The opposite outcome can happen if a strong contractionary policy appreciates the peso and reduces its holding cost

Hybrid optimisation and formation of index tracking portfolio in TSE

Asset allocation and portfolio optimisation are some of the most important steps in an investors decision making process. In order to manage uncertainty and maximise returns, it is assumed that active investment is a zero-sum game. It is possible however, that market inefficiencies could provide the necessary opportunities for investors to beat the market. In this study we examined a core-satellite approach to gain higher returns than that of the market. The core component of the portfolio consists of an index-tracking portfolio which has been formulated using a meta-heuristic genetic algorithm, allowing for the efficient search of the solution space for an optimal (or near-optimal) solution. The satellite component is made up of publicly traded active managed funds and the weights of each component are optimised using mathematical modelling (quadratics) to maximise the returns of the resultant portfolio.In order to address uncertainty within the model variables, robustness is introduced into the objective function of the model in the form of risk tolerance (Degree of uncertainty). The introduction of robustness as a variable allows us to assess the resultant model in worst-case circumstances and determine suitable levels of risk tolerance. Further attempts at implementing additional robustness within the model using an artificial neural network in an LSTM configuration were inconclusive, suggesting that LSTM networks were unable to make informative predictions on the future returns of the index because market efficiencies render historical data irrelevant and market movement is akin to a random walk. A framework is offered for the formation and optimisation of a hybrid multi-stage core-satellite portfolio which manages risk through the implementation of robustness and passive investment, whilst attempting to beat the market in terms of returns. Using daily returns data from the Tehran Stock Exchange for a four-year period, it is shown that the resultant core-satellite portfolio is able to beat the market considerably after training.Results indicate that the tracking ability of the portfolio is affected by the number of its constituents, that there is a specific time frame of 70 days after which the resultant portfolio needs to be re assessed and readjusted and that the implementation of robustness as a degree of uncertainty variable within the objective function increases the correlation coefficient and reduces tracking error.Keywords: Index Funds, Index Tracking, Passive Portfolio Management, Robust Optimisation, Core Satellite Investment, Quadratic Optimisation, Genetic Algorithms, LSTM, Heuristic Neural Networks, Efficient Market Hypothesis, Modern Portfolio Theory, Portfolio optimisatio

The Relative Risk Performance of the Islamic Sukuks over the Conventional Bonds: New Evidence from Value at Risk Approach

Sukuk are financial instruments similar to bonds that are compliant with Shari’ah (Islamic law). Since their inception in 2002, sukuk markets have experienced dramatic growth rates, attracting the attention of investors, analysts, and researchers alike. Despite Islamic bonds (thereafter termed sukuk) successfully holding their place in the international bond markets, this dissertation’s literature survey reveals that few empirical studies have undertaken a risk analysis of sukuk markets from the investors’ perspectives. Conventional bonds and sukuk as financial instruments are both exposed to various types of financial and market risks. This dissertation’s purpose is to engage in a risk analysis of sukuk markets compared with conventional bonds. Using a value at risk (VaR) approach, we examine whether sukuk are exposed to higher market risks than conventional bonds. In addition, we investigate whether the inclusion of sukuk in investment portfolios provides a diversification benefit to individual investors. We find that, for a given issuer, a conventional bonds’ VaR is significantly higher than that of sukuk, indicating that sukuk are less risky. We also find evidence of persistent sukuk illiquidity. We further show that introducing a sukuk allocation to a bond portfolio improves the risk–return trade-off. This dissertation’s findings have important policy implications for investors and Islamic bond issuers. Moreover, they are of particular importance to policy makers

Location-allocation problem for banking correspondent services : the colombian urban market case

Banking correspondents are a channel through which third parties operate on behalf of a bank, under a contract authorising the provision of some banking services. This model has been implemented extensively in developing countries, as a channel to increase financial inclusion by bringing financial products and services closer to marginalised populations. However, there is a lack of studies on the criteria employed by banks when selecting retailers to turn into banking correspondents (BC), in turn preventing the channel from offering a service portfolio adequate to the capacities of the retailers providing this kind of services, affecting the profitability and sustainability of the channel. The current research parted from the agency theory, which allowed to understand the relationship between the parties involved in the delivery of BC services, seeking to boost financial inclusion in Colombia through the development of the BC channel by solving the problem of location and portfolio allocation for retailers acting as banking correspondents in Colombian urban zones. It parted from the case of Bogota, where improvements were achieved in the selection of retailers and portfolio allocation, thus enhancing the relationship between agents, allowing banks to select banking correspondents and allocating them a particular service portfolio, while transaction volumes and channel profits are maximised. This was done through the development of a methodology comprising five stages, namely: (a) the development of a taxonomy on network integration models and financial services; (b) the development of a taxonomy on the strategies of small and medium retailers that could be selected as banking correspondents; (c) the validation of both taxonomies through cluster analyses; (d) validation of the resulting classifications through an ANOVA and a Kruskal-Wallis H test; and (e) the elaboration of a chance-constrained programming model that uses the elements built and validated in the formers stages. A classification of retailers was obtained from factors related to their operational and business strategies, as well as a classification of banking correspondents based on their service portfolios. It was also noted there is a significant relationship between the groups from both classifications, which led to the chance-constrained programming model being run on a sample of retailers in Bogotá, located at the borough of Suba. The model enabled to select those retailers best suited to become banking correspondents, determining the number of transactions according to their constraints in terms of retailer capabilities, banks and the environment, while estimating the expected income from these banking correspondent operationsTesi

Portfolio optimisation using the Johannesburg Securities Exchange tradable indices : an application of the Markowitz's mean-variance framework

The aim of this study was to assess the feasibility of constructing optimal portfolios using the Johannesburg Securities Exchange tradable sector indices. Three indices were employed, namely Financials, Industrials and Resources and were benchmarked against the JSE All Share Index for the period January 2007 to December 2017. The period was split into three, namely before the 2007-2009 global financial crises, during the global financial crises and after the global financial crises. The Markowitz’s mean-variance optimisation framework was employed for the construction of global mean variance portfolios. The results of this study showed that it was feasible to construct mean-variance efficient portfolios using tradable sector indices from the Johannesburg Securities Exchange. It was also established that, on the other hand, global mean variance portfolios constructed in this study, outperformed the benchmark index in a bullish market in terms of the risk-return combinations. On the other hand, in bear markets, the global mean variance portfolios were observed to perform better than the benchmark index in terms of risk. Further, the results of the study showed that portfolios constructed from the three tradable indices yielded diversification benefits despite their positive correlation with each other. The results of the study corroborate the findings by other scholars that the mean-variance optimisation framework is effective in the construction of optimal portfolios using the Johannesburg Securities Exchange. The study also demonstrated that Markowitz’s mean-variance framework could be applied by investors faced with a plethora of investment choices to construct efficient portfolios utilising the Johannesburg Securities Exchange tradable sector indices to achieve returns commensurate with their risk preferences.Business ManagementM. Com. (Business Management

Optimization model for banking asset liability management

This study introduces an optimization model to assist Asset and Liability Management (ALM) departments in mitigating interest rate risk (IRR) within fixed-income portfolios. The model incorporates real-world constraints, including the cost of administering interest rate derivatives and liquidity constraints, aiming to formulate effective hedge strategies across diverse scenarios. In particular, liquidity constraints gain significance, as market limitations can hinder the execution of derivatives hedging strategies, a concern particularly relevant in emerging markets with lower trading volumes. The study provides a comprehensive backtesting of the model under various portfolio lengths, nominal values, and shapes, revealing key insights. The analysis underscores the critical role of $duration and$convexity constraints in determining hedge strategy effectiveness. Liquidity constraints emerge as a pivotal factor influencing the allocation of future contracts and strategy feasibility. The study contributes a nuanced understanding of interest rate risk management, offering practitioners a valuable decision-making framework considering real-world constraints.Este estudo apresenta um modelo de otimização projetado para auxiliar os departamentos de Gestão de Ativos e Passivos (ALM) na mitigação do risco de taxa de juros (IRR) em carteiras de renda fixa. O modelo incorpora restrições práticas, incluindo o custo de administracao de derivativos de taxa de juros e restricoes de liquidez, com o objetivo de formular estrategias eficazes de protecao em diversos cenarios. Em particular, as restricoes de liquidez ganham importancia, uma vez que limitações de mercado podem dificultar a execucao de estrategias de protecao com derivativos, uma preocupacao especialmente relevante em mercados emergentes com volumes de negociacao mais baixos. O custo de negociação, nesse contexto, engloba as despesas associadas a negociacao e monitoramento de multiplos instrumentos derivativos. Notavelmente, nossa abordagem minimiza o numero de contratos futuros necessarios para a protecao contra o risco de taxa de juros. O estudo oferece uma análise abrangente do modelo em diversos comprimentos de carteira, valores nominais e formatos, revelando insights importantes. A analise destaca o papel das restrições de $duration e$convexity na determinação da eficácia da estrategia de proteção. Restrições de liquidez surgem como um fator fundamental que influencia a alocação de contratos futuros e a viabilidade da estratégia. O estudo contribui para uma compreensão detalhada da gestão de risco de taxa de juros, oferecendo aos profissionais um valioso framework de tomada de decisão considerando restrições práticas como liquidez e custo de administração das estratégias

Analyzing Fiscal Policy and Growth with a Calibrated Macro Model

CEE countries experience a catching up period in economic growth while preparing for accession to the European Union. In several countries we experience an expenditure boom arising either from exuberant expectations of consumers towards EU or EM or a fiscal deficit usually underpinned by an argument that a reallocation of total consumption at the expense of the future is a result of intertemporal optimization. The paper analyses whether this argument is justifiable. The key factors that influence the intertemporal trade-off are country risk and externalities from foreign direct investments. High indebtedness increases macroeconomic risk and discourages investments. If investment externalities exist the investment gap may cause high output loss. With careful calibration of the parameters determining the risk premium and the external effects of FDI the model predicts a 20% annual return of fiscal austerity at the macro level. This number is too high to be justifiable by any reasonable rate of time preference.Catching-up, Risk Premium, FDI, Consumption boom, Simulation.