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Designing Portfolios of Financial Products via Integrated Simulation and Optimization Models


  • Andrea Consiglio

    (University of Calabria, Italy)

  • Stavros A. Zenios

    (University of Cyprus, Nicosia, Cyprus)


We analyze the problem of debt issuance through the sale of innovative financial products. The problem is broken down to questions of designing the financial products, specifying the debt structure with the amount issued in each product, and determining an optimal level of financial leverage . We formulate a hierarchical optimization model to integrate these three issues and provide constructive answers. Input data for the models are obtained from Monte Carlo simulation procedures that generate scenarios of holding period returns of the designed products.The hierarchical optimization model is specialized for the problem of issuing a portfolio of callable bonds to fund mortgage assets. The upper level optimization program is multimodal, and a tabu search procedure is developed for its solution. Empirical results illustrate the efficacy of the developed models in designing the appropriate structure of the callable bonds and making optimal allocations of equity and debt among the designed products. Computational results with the implementation of tabu search—on both serial and parallel computers—are also presented.

Suggested Citation

  • Andrea Consiglio & Stavros A. Zenios, 1999. "Designing Portfolios of Financial Products via Integrated Simulation and Optimization Models," Operations Research, INFORMS, vol. 47(2), pages 195-208, April.
  • Handle: RePEc:inm:oropre:v:47:y:1999:i:2:p:195-208
    DOI: 10.1287/opre.47.2.195

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    References listed on IDEAS

    1. Stephen A. Ross, 1989. "Institutional Markets, Financial Marketing, and Financial Innovation," Journal of Finance, American Finance Association, vol. 44(3), pages 541-556, July.
    2. Fred Glover, 1989. "Tabu Search---Part I," INFORMS Journal on Computing, INFORMS, vol. 1(3), pages 190-206, August.
    3. David R. Cariño & Terry Kent & David H. Myers & Celine Stacy & Mike Sylvanus & Andrew L. Turner & Kouji Watanabe & William T. Ziemba, 1994. "The Russell-Yasuda Kasai Model: An Asset/Liability Model for a Japanese Insurance Company Using Multistage Stochastic Programming," Interfaces, INFORMS, vol. 24(1), pages 29-49, February.
    4. Stephen A. Ross, 1989. "Institutional Markets, Financial Marketing, and Financial Innovation," Journal of Finance, American Finance Association, vol. 44(3), pages 541-556, July.
    5. John M. Mulvey & Stavros A. Zenios, 1994. "Capturing the Correlations of Fixed-income Instruments," Management Science, INFORMS, vol. 40(10), pages 1329-1342, October.
    6. Miller, Merton H., 1986. "Financial Innovation: The Last Twenty Years and the Next," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(4), pages 459-471, December.
    7. 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.
    8. 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.
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    Cited by:

    1. Andrea Consiglio & Alessandro Staino, 2012. "A stochastic programming model for the optimal issuance of government bonds," Annals of Operations Research, Springer, vol. 193(1), pages 159-172, March.


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