Dynamic Programming Models and Algorithms for the Mutual Fund Cash Balance Problem
Fund managers have to decide the amount of a fund's assets that should be kept in cash, considering the trade-off between being able to meet shareholder redemptions and minimizing the opportunity cost from lost investment opportunities. In addition, they have to consider redemptions by individuals as well as institutional investors, the current performance of the stock market and interest rates, and the pattern of investments and redemptions that are correlated with market performance. We formulate the problem as a dynamic program, but this encounters the classic curse of dimensionality. To overcome this problem, we propose a provably convergent approximate dynamic programming algorithm. We also adapt the algorithm to an online environment, requiring no knowledge of the probability distributions for rates of return and interest rates. We use actual data for market performance and interest rates, and demonstrate the quality of the solution (compared to the optimal) for the top 10 mutual funds in each of nine fund categories. We show that our results closely match the optimal solution (in considerably less time), and outperform two static (newsvendor) models. The result is a simple policy that describes when money should be moved into and out of cash based on market performance.
Volume (Year): 56 (2010)
Issue (Month): 5 (May)
|Contact details of provider:|| Postal: |
Web page: http://www.informs.org/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:56:y:2010:i:5:p:801-815. 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: (Mirko Janc)
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 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.