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A Modified Harmony Search Algorithm For Portfolio Optimization Problems

Author

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  • ShouHeng Tuo

    (School of Mathematics and Computer Science Shaanxi University of Technology Hanzhong 723000, P.R.China)

Abstract

For a diversified portfolio problem, building an optimization model is very necessary to make investment return be as large as possible and to make the investment risk be as small as possible. In this work, firstly, the basic mathematic model of Portfolio Optimization (PO) and Cardinality Constrained Mean–Variance (CCMV) model are introduced. Then a modified Harmony search algorithm called HSDS based on Dimensional-Selection (DS) strategy and dynamic fret width (FW) strategy is proposed to solve PO problems, in which the DS strategy is for avoiding generating invalid solutions and the FW strategy is to balance global exploration and local exploitation. Finally, Genetic Algorithm, Particle Swarm Optimization, Simulated Annealing and Tabu Search are compared with the HSDS algorithm employing five portfolio problems (HangSeng, DAX 100, FTSE 100, S&P 100 and Nikkei). Experimental results indicate that the proposed algorithm is very effective for solving large scale portfolio optimization problems.

Suggested Citation

  • ShouHeng Tuo, 2016. "A Modified Harmony Search Algorithm For Portfolio Optimization Problems," ECONOMIC COMPUTATION AND ECONOMIC CYBERNETICS STUDIES AND RESEARCH, Faculty of Economic Cybernetics, Statistics and Informatics, vol. 50(1), pages 311-326.
    • Handle: RePEc:cys:ecocyb:v:50:y:2016:i:1:p:311-326
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    References listed on IDEAS

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    1. Chamberlain, Gary, 1983. "A characterization of the distributions that imply mean--Variance utility functions," Journal of Economic Theory, Elsevier, vol. 29(1), pages 185-201, February.
    2. Hiroshi Konno & Hiroaki Yamazaki, 1991. "Mean-Absolute Deviation Portfolio Optimization Model and Its Applications to Tokyo Stock Market," Management Science, INFORMS, vol. 37(5), pages 519-531, May.
    3. Merton, Robert C., 1972. "An Analytic Derivation of the Efficient Portfolio Frontier," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 7(4), pages 1851-1872, September.
    4. Owen, Joel & Rabinovitch, Ramon, 1983. "On the Class of Elliptical Distributions and Their Applications to the Theory of Portfolio Choice," Journal of Finance, American Finance Association, vol. 38(3), pages 745-752, June.
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    Cited by:

    1. Jin Hee Yoon & Zong Woo Geem, 2021. "Empirical Convergence Theory of Harmony Search Algorithm for Box-Constrained Discrete Optimization of Convex Function," Mathematics, MDPI, vol. 9(5), pages 1-13, March.

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    More about this item

    Keywords

    Portfolio Optimization; Harmony search Algorithm; Dimensional-selection strategy; Cardinality Constrained Mean-Variance Model;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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