IDEAS home Printed from https://ideas.repec.org/a/inm/orinte/v33y2003i2p12-24.html
   My bibliography  Save this article

Applying Operations Research Techniques to Financial Markets

Author

Listed:
  • John Board

    () (Department of Accounting and Finance, London School of Economics and Political Science, London WC2A 2AE, United Kingdom)

  • Charles Sutcliffe

    () (Accounting and Finance Division, School of Management, University of Southampton, Southampton SO17 1BJ, United Kingdom)

  • William T. Ziemba

    () (Operations and Logistics Division, Faculty of Commerce and Business Administration, University of British Columbia, 2053 Main Mall, Vancouver, British Columbia, Canada V6T 1Z2)

Abstract

OR techniques are applied to nonportfolio problems in financial markets, such as the equity, debt, and foreign exchange markets and the corresponding derivatives markets. Finance problems are an excellent application area for OR researchers. OR techniques are used to value financial instruments, identify market imperfections, design securities, regulate markets, evaluate and control risks, model strategic problems, and understand the functioning of financial markets. Mathematical programming is probably the most widely applied OR technique, but Monte Carlo simulation methods are of increasing importance. With the improvements in the real-time availability of data and the power of computers, the role of OR techniques in financial markets can only increase.

Suggested Citation

  • John Board & Charles Sutcliffe & William T. Ziemba, 2003. "Applying Operations Research Techniques to Financial Markets," Interfaces, INFORMS, vol. 33(2), pages 12-24, April.
  • Handle: RePEc:inm:orinte:v:33:y:2003:i:2:p:12-24
    DOI: 10.1287/inte.33.2.12.14465
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/inte.33.2.12.14465
    Download Restriction: no

    References listed on IDEAS

    as
    1. Basso, Antonella & Funari, Stefania, 2001. "A data envelopment analysis approach to measure the mutual fund performance," European Journal of Operational Research, Elsevier, vol. 135(3), pages 477-492, December.
    2. Dutta, Prajit K & Madhavan, Ananth, 1997. "Competition and Collusion in Dealer Markets," Journal of Finance, American Finance Association, vol. 52(1), pages 245-276, March.
    3. Hutchinson, James M & Lo, Andrew W & Poggio, Tomaso, 1994. "A Nonparametric Approach to Pricing and Hedging Derivative Securities via Learning Networks," Journal of Finance, American Finance Association, vol. 49(3), pages 851-889, July.
    4. Marshall Freimer & Mendu R. Rao & H. Martin Weingartner, 1972. "Notes--Note on "Municipal Bond Coupon Schedules with Limitations on the Number of Coupons"," Management Science, INFORMS, vol. 19(4-Part-1), pages 379-380, December.
    5. Donald B. Hausch & William T. Ziemba & Mark Rubinstein, 1981. "Efficiency of the Market for Racetrack Betting," Management Science, INFORMS, vol. 27(12), pages 1435-1452, December.
    6. J. G. Kallberg & W. T. Ziemba, 1983. "Comparison of Alternative Utility Functions in Portfolio Selection Problems," Management Science, INFORMS, vol. 29(11), pages 1257-1276, November.
    7. Kalman J. Cohen & Frederick S. Hammer, 1966. "Optimal Level Debt Schedules for Municipal Bonds," Management Science, INFORMS, vol. 13(3), pages 161-166, November.
    8. Yosi Ben-Dov & Lakhbir Hayre & Vincent Pica, 1992. "Mortgage Valuation Models at Prudential Securities," Interfaces, INFORMS, vol. 22(1), pages 55-71, February.
    9. Dryden, Myles M, 1969. "Share Price Movements: A Markovian Approach," Journal of Finance, American Finance Association, vol. 24(1), pages 49-60, March.
    10. Firer, C & Sandler, M & Ward, M, 1992. "Market timing: A worthwhile strategy?," Omega, Elsevier, vol. 20(3), pages 313-322, May.
    11. Imelda Yeung Powers, 1987. "A Game-Theoretic Model of Corporate Takeovers by Major Stockholders," Management Science, INFORMS, vol. 33(4), pages 467-483, April.
    12. Jackwerth, Jens Carsten & Rubinstein, Mark, 1996. "Recovering Probability Distributions from Option Prices," Journal of Finance, American Finance Association, vol. 51(5), pages 1611-1632, December.
    13. Corwin Joy & Phelim P. Boyle & Ken Seng Tan, 1996. "Quasi-Monte Carlo Methods in Numerical Finance," Management Science, INFORMS, vol. 42(6), pages 926-938, June.
    14. Paul Zipkin, 1993. "Mortgages and Markov Chains: A Simplified Evaluation Model," Management Science, INFORMS, vol. 39(6), pages 683-691, June.
    15. Ramesh Sharda, 1987. "A Simple Model to Estimate Bounds on Total Market Gains and Losses for a Particular Stock," Interfaces, INFORMS, vol. 17(5), pages 43-50, October.
    16. G. O. Bierwag, 1976. "Optimal TIC Bids on Serial Bond Issues," Management Science, INFORMS, vol. 22(11), pages 1175-1185, July.
    17. Murthi, B. P. S. & Choi, Yoon K. & Desai, Preyas, 1997. "Efficiency of mutual funds and portfolio performance measurement: A non-parametric approach," European Journal of Operational Research, Elsevier, vol. 98(2), pages 408-418, April.
    18. Mark Broadie & Paul Glasserman, 1996. "Estimating Security Price Derivatives Using Simulation," Management Science, INFORMS, vol. 42(2), pages 269-285, February.
    19. Matthew Pritsker, 1997. "Evaluating Value at Risk Methodologies: Accuracy versus Computational Time," Journal of Financial Services Research, Springer;Western Finance Association, vol. 12(2), pages 201-242, October.
    20. Kenneth R. Baker & James H. Vander Weide, 1982. "The Bond Scheduling Problem of the Multi-Subsidiary Holding Company," Management Science, INFORMS, vol. 28(7), pages 738-748, July.
    21. Ross Clark & William T. Ziemba, 1987. "OR Practice—Playing the Turn-of-the-Year Effect with Index Futures," Operations Research, INFORMS, vol. 35(6), pages 799-813, December.
    22. Keim,Donald B. & Ziemba,William T. (ed.), 2000. "Security Market Imperfections in Worldwide Equity Markets," Cambridge Books, Cambridge University Press, number 9780521571388, December.
    23. Christofides, N. & Hewins, R. D. & Salkin, G. R., 1979. "Graph Theoretic Approaches to Foreign Exchange Operations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 14(3), pages 481-500, September.
    24. Myles M. Dryden, 1968. "Short-Term Forecasting Of Share Prices: An Information Theory Approach," Scottish Journal of Political Economy, Scottish Economic Society, vol. 15(1), pages 227-249, February.
    25. P. R. Chandy & Prakash Kharabe, 1986. "Pricing in the Government Bond Market," Interfaces, INFORMS, vol. 16(5), pages 65-71, October.
    26. A. A. Elimam & M. Girgis & S. Kotob, 1997. "A Solution to Post Crash Debt Entanglements in Kuwait's al-Manakh Stock Market," Interfaces, INFORMS, vol. 27(1), pages 89-106, February.
    27. Garman, Mark B., 1976. "An algebra for evaluating hedge portfolios," Journal of Financial Economics, Elsevier, vol. 3(4), pages 403-427, October.
    28. Mark Rubinstein., 1994. "Implied Binomial Trees," Research Program in Finance Working Papers RPF-232, University of California at Berkeley.
    29. Dwight Grant & Gautam Vora & David Weeks, 1997. "Path-Dependent Options: Extending the Monte Carlo Simulation Approach," Management Science, INFORMS, vol. 43(11), pages 1589-1602, November.
    30. Ashford, Robert W. & Berry, Robert H. & Dyson, Robert G., 1988. "Operational research and financial management," European Journal of Operational Research, Elsevier, vol. 36(2), pages 143-152, August.
    31. Boyle, Phelim P., 1977. "Options: A Monte Carlo approach," Journal of Financial Economics, Elsevier, vol. 4(3), pages 323-338, May.
    32. del Angel, Gabriela F. & Diez-Canedo, Javier Marquez & Gorbea, Estela Patino, 1998. "A discrete Markov chain model for valuing loan portfolios. The case of Mexican loan sales," Journal of Banking & Finance, Elsevier, vol. 22(10-11), pages 1457-1480, October.
    33. P. Gopikrishnan & M. Meyer & L.A.N. Amaral & H.E. Stanley, 1998. "Inverse cubic law for the distribution of stock price variations," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 3(2), pages 139-140, July.
    34. H. Martin Weingartner, 1972. "Municipal Bond Coupon Schedules with Limitations on the Number of Coupons," Management Science, INFORMS, vol. 19(4-Part-1), pages 369-378, December.
    35. H. Martin Weingartner, 1967. "Optimal Timing of Bond Refunding," Management Science, INFORMS, vol. 13(7), pages 511-524, March.
    36. Robert M. Nauss, 1986. "True Interest Cost in Municipal Bond Bidding: An Integer Programming Approach," Management Science, INFORMS, vol. 32(7), pages 870-877, July.
    37. Ziemba, William T., 1994. "World wide security market regularities," European Journal of Operational Research, Elsevier, vol. 74(2), pages 198-229, April.
    38. Boyle, Phelim & Broadie, Mark & Glasserman, Paul, 1997. "Monte Carlo methods for security pricing," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1267-1321, June.
    39. Donald B. Hausch & William T. Ziemba, 1985. "Transactions Costs, Extent of Inefficiencies, Entries and Multiple Wagers in a Racetrack Betting Model," Management Science, INFORMS, vol. 31(4), pages 381-394, April.
    40. Abdelghani A. Elimam & Maurice Girgis & Samir Kotob, 1996. "The Use of Linear Programming in Disentangling the Bankruptcies of Al-Manakh Stock Market Crash," Operations Research, INFORMS, vol. 44(5), pages 665-676, October.
    41. M. A. H. Dempster & J. P. Hutton, 1999. "Pricing American Stock Options by Linear Programming," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 229-254, July.
    42. Ben-Horim, Moshe & Silber, William L., 1977. "Financial innovation : A linear programming approach," Journal of Banking & Finance, Elsevier, vol. 1(3), pages 277-296, November.
    43. Bauer, Paul W. & Berger, Allen N. & Ferrier, Gary D. & Humphrey, David B., 1998. "Consistency Conditions for Regulatory Analysis of Financial Institutions: A Comparison of Frontier Efficiency Methods," Journal of Economics and Business, Elsevier, vol. 50(2), pages 85-114, March.
    44. Consiglio, Andrea & Zenios, Stavros A., 1997. "A model for designing callable bonds and its solution using tabu search," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1445-1470, June.
    45. Charles J. Litty, 1994. "Optimal Lease Structuring at GE Capital," Interfaces, INFORMS, vol. 24(3), pages 34-45, June.
    46. Kraus, Alan, 1973. "The Bond Refunding Decision in an Efficient Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 8(5), pages 793-806, December.
    47. Kalman J. Cohen & Frederick S. Hammer, 1965. "Optimal Coupon Schedules for Municipal Bonds," Management Science, INFORMS, vol. 12(1), pages 68-82, September.
    48. Bruce D. Grundy, 2001. "Merton H. Miller: His Contribution to Financial Economics," Journal of Finance, American Finance Association, vol. 56(4), pages 1183-1206, August.
    49. Jackwerth, Jens Carsten, 1999. "Option Implied Risk-Neutral Distributions and Implied Binomial Trees: A Literature Review," MPRA Paper 11634, University Library of Munich, Germany.
    50. J. Shaw & E. O. Thorp & W. T. Ziemba, 1995. "Risk arbitrage in the Nikkei put warrant market of 1989-1990," Applied Mathematical Finance, Taylor & Francis Journals, vol. 2(4), pages 243-272.
    51. Elton, Edwin J & Gruber, Martin J, 1971. "Dynamic Programming Applications in Finance," Journal of Finance, American Finance Association, vol. 26(2), pages 473-506, May.
    52. Philippe Artzner & Freddy Delbaen & Jean‐Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228, July.
    53. John M. Mulvey & Hercules Vladimirou, 1992. "Stochastic Network Programming for Financial Planning Problems," Management Science, INFORMS, vol. 38(11), pages 1642-1664, November.
    54. Rubinstein, Mark, 1994. "Implied Binomial Trees," Journal of Finance, American Finance Association, vol. 49(3), pages 771-818, July.
    55. Hausch, Donald B & Ziemba, William T, 1990. "Arbitrage Strategies for Cross-Track Betting on Major Horse Races," The Journal of Business, University of Chicago Press, vol. 63(1), pages 61-78, January.
    56. Martin R. Holmer & Stavros A. Zenios, 1995. "The Productivity of Financial Intermediation and the Technology of Financial Product Management," Operations Research, INFORMS, vol. 43(6), pages 970-982, December.
    57. Bertsimas, Dimitris & Lo, Andrew W., 1998. "Optimal control of execution costs," Journal of Financial Markets, Elsevier, vol. 1(1), pages 1-50, April.
    58. Robert M. Nauss & B. R. Keeler, 1981. "Minimizing Net Interest Cost in Municipal Bond Bidding," Management Science, INFORMS, vol. 27(4), pages 365-376, April.
    59. repec:dau:papers:123456789/3569 is not listed on IDEAS
    60. Parameswaran Gopikrishnan & Martin Meyer & Luis A Nunes Amaral & H Eugene Stanley, 1998. "Inverse Cubic Law for the Probability Distribution of Stock Price Variations," Papers cond-mat/9803374, arXiv.org, revised May 1998.
    61. Ritchken, Peter H, 1985. "On Option Pricing Bounds," Journal of Finance, American Finance Association, vol. 40(4), pages 1219-1233, September.
    62. Broadie, Mark & Glasserman, Paul, 1997. "Pricing American-style securities using simulation," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1323-1352, June.
    63. Hodges, S. D. & Schaefer, S. M., 1977. "A Model for Bond Portfolio Improvement," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(2), pages 243-260, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jason R. W. Merrick & Jill R. Hardin & Russell Walker, 2006. "Partnerships in Training," Interfaces, INFORMS, vol. 36(4), pages 359-370, August.
    2. Marchioni, Andrea & Magni, Carlo Alberto, 2018. "Investment decisions and sensitivity analysis: NPV-consistency of rates of return," European Journal of Operational Research, Elsevier, vol. 268(1), pages 361-372.
    3. Kishore Meghani, Kishore Meghani, 2014. "Financial Performance Of Axis Bank And Kotak Mahindra Bank In The Post Reform Era: Analysis On CAMEL Model," MPRA Paper 60260, University Library of Munich, Germany.
    4. Victor Dragotă & Elena Ţilică, 2014. "Market efficiency of the Post Communist East European stock markets," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 22(2), pages 307-337, June.
    5. Nurşen Aydın & Ş. İlker Birbil & Hüseyin Topaloğlu, 2017. "Delayed Purchase Options in Single-Leg Revenue Management," Transportation Science, INFORMS, vol. 51(4), pages 1031-1045, November.
    6. Javid Iqbal, 2019. "Managerial Self-Attribution Bias and Banks’ Future Performance: Evidence from Emerging Economies," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 12(2), pages 1-1, April.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:orinte:v:33:y:2003:i:2:p:12-24. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Matthew Walls). General contact details of provider: http://edirc.repec.org/data/inforea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.