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Differential Evolution for Multiobjective Portfolio Optimization

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  • Thiemo Krink

    ()

  • Sandra Paterlini

    ()

Abstract

Financial portfolio optimization is a challenging problem. First, the problem is multiobjective (i.e.: minimize risk and maximize profit) and the objective functions are often multimodal and non smooth (e.g.: value at risk). Second, managers have often to face real-world constraints, which are typically non-linear. Hence, conventional optimization techniques, such as quadratic programming, cannot be used. Stochastic search heuristic can be an attractive alternative. In this paper, we propose a new multiobjective algorithm for portfolio optimization: DEMPO - Differential Evolution for Multiobjective Portfolio Optimization. The main advantage of this new algorithm is its generality, i.e., the ability to tackle a portfolio optimization task as it is, without simplifications. Our empirical results show the capability of our approach of obtaining highly accurate results in very reasonable runtime, in comparison with quadratic programming and another state-of-art search heuristic, the so-called NSGA II.

Suggested Citation

  • Thiemo Krink & Sandra Paterlini, 2008. "Differential Evolution for Multiobjective Portfolio Optimization," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 08012, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
  • Handle: RePEc:mod:wcefin:08012
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    References listed on IDEAS

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    1. Manfred Gilli & Evis Këllezi & Hilda Hysi, "undated". "A Data-Driven Optimization Heuristic for Downside Risk Minimization," Swiss Finance Institute Research Paper Series 06-02, Swiss Finance Institute.
    2. Toker Doganoglu & Christoph Hartz & Stefan Mittnik, 2007. "Portfolio optimization when risk factors are conditionally varying and heavy tailed," Computational Economics, Springer;Society for Computational Economics, vol. 29(3), pages 333-354, May.
    3. R. Cont, 2001. "Empirical properties of asset returns: stylized facts and statistical issues," Quantitative Finance, Taylor & Francis Journals, vol. 1(2), pages 223-236.
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    Cited by:

    1. Yaldız Hanedar, Elmas & Broccardo, Eleonora & Bazzana, Flavio, 2014. "Collateral requirements of SMEs: The evidence from less-developed countries," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 106-121.
    2. Elisabetta Gualandri & Valeria Venturelli, 2013. "The financing of Italian firms and the credit crunch: findings and exit strategies," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 13101, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    3. Stefano Cosma & Francesco Pattarin, 2012. "Attitudes, personality factors and household debt decisions: A study of consumer credit," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 12021, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    4. Elena Giarda & Gloria Moroni, 2015. "‘It’s a trap!’ The degree of poverty persistence in Italy and Europe," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 15109, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    5. C. Pederzoli & C. Torricelli, 2013. "Efficiency and unbiasedness of corn futures markets: new evidence across the financial crisis," Applied Financial Economics, Taylor & Francis Journals, vol. 23(24), pages 1853-1863, December.
    6. Marianna Lyra, 2010. "Heuristic Strategies in Finance – An Overview," Working Papers 045, COMISEF.
    7. Ardia, David & Boudt, Kris & Carl, Peter & Mullen, Katharine M. & Peterson, Brian, 2010. "Differential Evolution (DEoptim) for Non-Convex Portfolio Optimization," MPRA Paper 22135, University Library of Munich, Germany.
    8. Lyra, M. & Paha, J. & Paterlini, S. & Winker, P., 2010. "Optimization heuristics for determining internal rating grading scales," Computational Statistics & Data Analysis, Elsevier, vol. 54(11), pages 2693-2706, November.
    9. Lisa Mattioli & Riccardo Ferretti, 2013. "La regolamentazione dello short selling: effetti sul mercato azionario italiano (Short selling ban: effects on the Italian stock market)," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 13081, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    10. Stefano Cosma & Elisabetta Gualandri, 2014. "The sovereign debt crisis: the impact on the intermediation model of Italian banks," BANCARIA, Bancaria Editrice, vol. 2, pages 48-60, February.
    11. Gianfranco Gianfelice & Giuseppe Marotta & Costanza Torricelli, 2015. "A liquidity risk index as a regulatory tool for systemically important banks? An empirical assessment across two financial crises," Applied Economics, Taylor & Francis Journals, vol. 47(2), pages 129-147, January.
    12. Elisabetta Gualandri & Mario Noera, 2014. "Towards A Macroprudential Policy In The Eu: Main Issues," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 14110, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    13. Carlo Alberto Magni, 2015. "Pseudo-naïve approaches to investment performance measurement," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 15021, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    14. Elisabetta Gualandri & Mario Noera, 2014. "Monitoring Systemic Risk: A Survey Of The Available Macroprudential Toolkit," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 14111, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    15. Enrico Rubaltelli & Sergio Agnoli & Michela Rancan & Tiziana Pozzoli, 2015. "Emotional Intelligence and risk taking in investment decision-making," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 15107, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    16. Chiara Pederzoli & Costanza Torricelli, 2010. "A parsimonious default prediction model for Italian SMEs," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 10061, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".

    More about this item

    Keywords

    Portfolio optimization; multiobjective; real world constraints; value at risk; expected shortfall; differential evolution;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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