22 research outputs found
Relative Robust Portfolio Optimization
Considering mean-variance portfolio problems with uncertain model parameters, we contrast the classical absolute robust optimization approach with the relative robust approach based on a maximum regret function. Although the latter problems are NP-hard in general, we show that tractable inner and outer approximations exist in several cases that are of central interest in asset management
Dynamic evolution for risk-neutral densities
Option price data is often used to infer risk-neutral densities for future
prices of an underlying asset. Given the prices of a set of options on the same
underlying asset with different strikes and maturities, we propose a nonparametric
approach for estimating the evolution of the risk-neutral density in time. Our
method uses bicubic splines in order to achieve the desired smoothness for the
estimation and an optimization model to choose the spline functions that best fit the
price data. Semidefinite programming is employed to guarantee the nonnegativity of
the densities. We illustrate the process using synthetic option price data generated
using log-normal and absolute diffusion processes as well as actual price data for
options on the S&P500 index.
We also used the risk-neutral densities that we computed to price exotic options
and observed that this approach generates prices that closely approximate the
market prices of these options.FCT POCI/MAT/59442/2004, PTDC/MAT/64838/2006
Portfolio Optimization Using SPEA2 with Resampling
Proceeding of: Intelligent Data Engineering and
Automated Learning – IDEAL 2011: 12th International Conference, Norwich, UK, September 7-9, 2011The subject of financial portfolio optimization under real-world constraints is a difficult problem that can be tackled using multiobjective evolutionary algorithms. One of the most problematic issues is the dependence of the results on the estimates for a set of parameters, that is, the robustness of solutions. These estimates are often inaccurate and this may result on solutions that, in theory, offered an appropriate risk/return balance and, in practice, resulted being very poor. In this paper we suggest that using a resampling mechanism may filter out the most unstable. We test this idea on real data using SPEA2 as optimization algorithm and the results show that the use of resampling increases significantly the reliability of the resulting portfolios.The authors acknowledge financial support granted by the Spanish Ministry of Science under contract TIN2008-06491-C04-03 (MSTAR) and Comunidad de Madrid (CCG10- UC3M/TIC-5029).Publicad
A note on calculating the optimal risky portfolio
Given a number of risky assets and a riskless asset, the set of efficient portfolios in the mean-variance optimization sense are combinations of the riskless asset and a unique optimal risky portfolio. This note shows how a simple modification of Markowitz' method of critical lines can be used to determine the optimal risky portfolio in a faster, more reliable, and more memory-efficient way than the standard approaches.Mean-variance optimization, optimal risky portfolio
Continuous Trajectories for Primal-Dual Potential-Reduction Methods
This article considers continuous trajectories of the vector fields induced by two different primal-dual potential-reduction algorithms for solving linear programming problems. For both algorithms, it is shown that the associated continuous trajectories include the central path and the duality gap converges to zero along all these trajectories. For the algorithm of Kojima, Mizuno, and Yoshise, there is a a surprisingly simple characterization of the associated trajectories. Using this characterization, it is shown that all associated trajectories converge to the analytic center of the primal-dual optimal face. Depending on the value of the potential function parameter, this convergence may be tangential to the central path, tangential to the optimal face, or in between. Key words: linear programming, potential functions, potential-reduction methods, central path, continuous trajectories for linear programming. AMS subject classification: 90C05
Dynamic evolution for risk-neutral densities
Option price data is often used to infer risk-neutral densities for future
prices of an underlying asset. Given the prices of a set of options on the same
underlying asset with different strikes and maturities, we propose a nonparametric
approach for estimating the evolution of the risk-neutral density in time. Our
method uses bicubic splines in order to achieve the desired smoothness for the
estimation and an optimization model to choose the spline functions that best fit the
price data. Semidefinite programming is employed to guarantee the nonnegativity of
the densities. We illustrate the process using synthetic option price data generated
using log-normal and absolute diffusion processes as well as actual price data for
options on the S&P500 index.
We also used the risk-neutral densities that we computed to price exotic options
and observed that this approach generates prices that closely approximate the
market prices of these options.FCT POCI/MAT/59442/2004, PTDC/MAT/64838/2006
Recovering risk-neutral probability density functions from options prices using cubic splines and ensuring nonnegativity
We present a new approach to estimate the risk-neutral probability density function (pdf) of the future prices of an underlying asset from the prices of options written on the asset. The estimation is carried out in the space of cubic spline functions, yielding appropriate smoothness. The resulting optimization problem, used to invert the data and determine the corresponding density function, is a convex quadratic or semidefinite programming problem, depending on the formulation. Both of these problems can be efficiently solved by numerical optimization software.http://www.sciencedirect.com/science/article/B6VCT-4NC4M8X-2/1/fed44dd574a24dbc1e9cd48bdb8185b