A local relaxation method for the cardinality constrained portfolio optimization problem
The NP-hard nature of cardinality constrained mean-variance portfolio optimization problems has led to a number of different algorithms with varying degrees of success in reaching optimality given limited computational resources and under the presence of strict time constraints present in practice. The proposed local relaxation algorithm explores the inherent structure of the objective function. It solves a sequence of small, local, quadratic-programs by first projecting asset returns onto a reduced metric space, followed by clustering in this space to identify sub-groups of assets that best accentuate a suitable measure of similarity amongst different assets. The algorithm can either be cold started using a suitable heuristic method such as the centroids of initial clusters or be warm started based on the last output. Results, using a basket of up to 3,000 stocks and with different cardinality constraints, indicates that the proposed algorithm can lead to significant performance gain over popular branch-and-cut methods. One key application of this algorithm is in dealing with large scale cardinality constrained portfolio optimization under tight time constraint, such as for the purpose of index tracking or index arbitrage at high frequency. Copyright Springer Science+Business Media, LLC 2012
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 53 (2012)
Issue (Month): 3 (December)
|Contact details of provider:|| Web page: http://www.springer.com|
|Order Information:||Web: http://www.springer.com/math/journal/10589|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Peter Reinhard Hansen & Zhuo Huang & Howard Howan Shek, 2012. "Realized GARCH: a joint model for returns and realized measures of volatility," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 27(6), pages 877-906, 09.
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
- 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.
- Hiroshi Konno & Rei Yamamoto, 2005. "Integer programming approaches in mean-risk models," Computational Management Science, Springer, vol. 4(4), pages 339-351, November.
- Andre F. Perold, 1984. "Large-Scale Portfolio Optimization," Management Science, INFORMS, vol. 30(10), pages 1143-1160, October.
- Yitzhaki, Shlomo, 1982. "Stochastic Dominance, Mean Variance, and Gini's Mean Difference," American Economic Review, American Economic Association, vol. 72(1), pages 178-85, March.
When requesting a correction, please mention this item's handle: RePEc:spr:coopap:v:53:y:2012:i:3:p:681-709. 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: (Sonal Shukla)or (Rebekah McClure)
If references are entirely missing, you can add them using this form.