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On a Local-Search Heuristic for a Class of Tracking Error Minimization Problems in Portfolio Management

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  • Ulrich Derigs
  • Nils-H. Nickel

Abstract

In this paper we describe a 2-phase simulated annealing heuristic approach for a special class of portfolio management problems: the problem of optimizing a stock fund with respect to tracking error and transaction costs over time subject to a set of complex constraints with a linear factor return model “feeding” the objective function with data. Our results on managing two real-world funds of a major German capital investment company have shown that this meta-heuristic provides proposals for the fund manager which are feasible with respect to the investment guidelines and excellent in quality in acceptable time. Thus the approach is ideally suited to be used routinely and interactively within a decision support system to assist the fund manager in his complex task of portfolio control and optimization. Copyright Kluwer Academic Publishers 2004

Suggested Citation

  • Ulrich Derigs & Nils-H. Nickel, 2004. "On a Local-Search Heuristic for a Class of Tracking Error Minimization Problems in Portfolio Management," Annals of Operations Research, Springer, vol. 131(1), pages 45-77, October.
    • Handle: RePEc:spr:annopr:v:131:y:2004:i:1:p:45-77:10.1023/b:anor.0000039512.98833.5a
    DOI: 10.1023/B:ANOR.0000039512.98833.5a
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    Cited by:

    1. Doering, Jana & Kizys, Renatas & Juan, Angel A. & Fitó, Àngels & Polat, Onur, 2019. "Metaheuristics for rich portfolio optimisation and risk management: Current state and future trends," Operations Research Perspectives, Elsevier, vol. 6(C).
    2. Giuseppe Galloppo, 2010. "A Comparison Of Pre And Post Modern Portfolio Theory Using Resampling," Global Journal of Business Research, The Institute for Business and Finance Research, vol. 4(1), pages 1-16.
    3. Woodside-Oriakhi, M. & Lucas, C. & Beasley, J.E., 2011. "Heuristic algorithms for the cardinality constrained efficient frontier," European Journal of Operational Research, Elsevier, vol. 213(3), pages 538-550, September.
    4. Lioui, Abraham & Poncet, Patrice, 2013. "Optimal benchmarking for active portfolio managers," European Journal of Operational Research, Elsevier, vol. 226(2), pages 268-276.

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