Flener&Pearson&Reyna; "Financial Portfolio Optimization"

"Financial Portfolio Optimization"

Pierre Flener (pierref@it.uu.se), Justin Pearson
Department of Information Technology
Uppsala University, Sweden

Luis G. Reyna
Global Private Investment Advisory Group,
Merrill Lynch, New York, USA

Abstract:
We give an approximate and often extremely fast method of solving a portfolio optimisation (PO) problem in financial mathematics, which has applications in the credit derivatives market (synthetic CDO, CDO2, CDO squared, Russian-doll CDO, ...).  Its corresponding satisfaction problem is closely related to the balanced incomplete block design (BIBD) problem.  However, typical PO instances are an order of magnitude larger than the largest BIBDs solved so far by global search.  Our method is based on embedding sub-instances into the original instance.  Their determination is itself a CSP.  This allows us to solve a typical PO instance, with over 10746 symmetries. The high quality of our approximate solutions can be assessed by comparison with a tight lower bound on the cost.  Also, our solutions sufficiently improve the currently best ones so as to often make the difference between having or not having a feasible transaction due to investor and rating-agency constraints.

Paper published in:
M. Wallace (editor), Proceedings of CP'04, the 10th International Conference
on Principles and Practice of Constraint Programming, pp. 227-241.
Lecture Notes in Computer Science, volume 3258.  Springer-Verlag, 2004.
(http://www.springerlink.com/index/7RGRUR32BVCML16T)

April 26, 2005, 15:40, FENS L045