A Two-Period Portfolio Selection Model for Asset-backed Securitization

Asset-Backed Securitization (ABS) is a well-stated financial mechanism which allows an institution (either a commercial bank or a firm) to get funds through the conversion of assets into capital market products called notes or asset-backed securities. In this paper, we analyze the combinatorial problem faced by the financial institution which has to optimally select the set of assets to be converted into notes. We assume that assets follow an amortization rule characterized by constant periodic principal installments (Italian amortization). The particular shape of the assets outstanding principal is exploited both in the mathematical formulation of the problem and in its solution. In particular, we study a model formulation for the special case where assets selection occurs at two dates during the securitization process. We introduce two heuristic approaches based on Lagrangian relaxation and analyze their worst-case behavior compared to the optimal solution value. The performance of the algorithms is tested on a large set of problem instances generated according to two real-world scenarios provided by a leasing company. The proposed approximation algorithms turn out to yield solutions of high quality within very short computation time. The comparison to the solution approach applied by practitioners yields an average improvement of roughly 10% of the objective function value

Enhanced index tracking with CVaR-based ratio measures

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Solving the Set Covering Problem with Conflicts on Sets: A new parallel GRASP

In this paper, we analyze a new variant of the well-known NP-hard Set Covering Problem, characterized by pairwise conflicts among subsets of items. Two subsets in conflict can belong to a solution provided that a positive penalty is paid. The problem looks for the optimal collection of subsets representing a cover and minimizing the sum of covering and penalty costs. We introduce two integer linear programming formulations and a quadratic one for the problem and provide a parallel GRASP (Greedy Randomized Adaptive Search Procedure) that, during parallel executions of the same basic procedure, shares information among threads. We tailor such a parallel processing to address the specific problem in an innovative way that allows us to prevent redundant computations in different threads, ultimately saving time. To evaluate the performance of our algorithm, we conduct extensive experiments on a large set of new instances obtained by adapting existing instances for the Set Covering Problem. Computational results show that the proposed approach is extremely effective and efficient providing better results than Gurobi (tackling three alternative mathematical formulations of the problem) in less than 1/6 of the computational time

Twenty years of linear programming based portfolio optimization

a b s t r a c t Markowitz formulated the portfolio optimization problem through two criteria: the expected return and the risk, as a measure of the variability of the return. The classical Markowitz model uses the variance as the risk measure and is a quadratic programming problem. Many attempts have been made to linearize the portfolio optimization problem. Several different risk measures have been proposed which are computationally attractive as (for discrete random variables) they give rise to linear programming (LP) problems. About twenty years ago, the mean absolute deviation (MAD) model drew a lot of attention resulting in much research and speeding up development of other LP models. Further, the LP models based on the conditional value at risk (CVaR) have a great impact on new developments in portfolio optimization during the first decade of the 21st century. The LP solvability may become relevant for real-life decisions when portfolios have to meet side constraints and take into account transaction costs or when large size instances have to be solved. In this paper we review the variety of LP solvable portfolio optimization models presented in the literature, the real features that have been modeled and the solution approaches to the resulting models, in most of the cases mixed integer linear programming (MILP) models. We also discuss the impact of the inclusion of the real features

Linear Programming Models based on Omega Ratio for the Enhanced Index Tracking Problem

Modern performance measures differ from the classical ones since they assess the performance against a benchmark and usually account for asymmetry in return distributions. The Omega ratio is one of these measures. Until recently, limited research has addressed the optimization of the Omega ratio since it has been thought to be computationally intractable. The Enhanced Index Tracking Problem (EITP) is the problem of selecting a portfolio of securities able to outperform a market index while bearing a limited additional risk. In this paper, we propose two novel mathematical formulations for the EITP based on the Omega ratio. The first formulation applies a standard definition of the Omega ratio where it is computed with respect to a given value, whereas the second formulation considers the Omega ratio with respect to a random target. We show how each formulation, nonlinear in nature, can be transformed into a Linear Programming model. We further extend the models to include real features, such as a cardinality constraint and buy-in thresholds on the investments, obtaining Mixed Integer Linear Programming problems. Computational results conducted on a large set of benchmark instances show that the portfolios selected by the model assuming a standard definition of the Omega ratio are consistently outperformed, in terms of out-of-sample performance, by those obtained solving the model that considers a random target. Furthermore, in most of the instances the portfolios optimized with the latter model mimic very closely the behavior of the benchmark over the out-of-sample period, while yielding, sometimes, significantly larger returns

The Nurse Routing Problem with Workload Constraints and Incompatible Services

Among the health care applications, nursing home services play a central role because of the growing request for long-term home care observed in the recent years. Nursing care providers can guarantee a wide variety of medical and supporting services for not-independent people such as elderly people and disabled itidividuals, highly improving the quality of their life. We propose and study an optimization problem that aims at scheduling the daily services performed by a set of nurses to a set of patients and, simultaneously; at routing the nurses in their visiting tours. The problem is further complicated by considering potential incompatibilities among pairs of services for a single patient in the same day. Through mathemaatical programming techniques, we model the problem as a variant of the multi vehicle traveling purchaser problem (MVTPP) and evaluate different solution strategies. Finally, we focus' on the applicability of a promising branch-and-price solution approach based on a set-covering reformulation of the problem