Finance and Economics

Time consistency and risk averse dynamic decision models: Definition, interpretation and practical consequences

  • Birgit Rudloff
  • Alexandre Street
  • Davi Valladão
    • Categories Finance and Economics, Stochastic Programming Tags , , , ,

    This paper aims at resolving a major obstacle to practical usage of time-consistent risk-averse decision models. The recursive objective function, generally used to ensure time consistency, is complex and has no clear/direct interpretation. Practitioners rather choose a simpler and more intuitive formulation, even though it may lead to a time inconsistent policy. Based on rigorous … Read more

    Time consistency and risk averse dynamic decision models: Definition, interpretation and practical consequences

  • Birgit Rudloff
  • Alexandre Street
  • Davi Valladão
    • Categories Finance and Economics, Stochastic Programming Tags , , , ,

    This paper aims at resolving a major obstacle to practical usage of time-consistent risk-averse decision models. The recursive objective function, generally used to ensure time consistency, is complex and has no clear/direct interpretation. Practitioners rather choose a simpler and more intuitive formulation, even though it may lead to a time inconsistent policy. Based on rigorous … Read more

    Construction of Risk-Averse Enhanced Index Funds

  • Miguel A. Lejeune
  • Gulay Samatli-Pac
    • Categories (Mixed) Integer Nonlinear Programming, Finance and Economics, Stochastic Programming Tags , , , ,

    We propose a partial replication strategy to construct risk-averse enhanced index funds. Our model takes into account the parameter estimation risk by defining the asset returns and the return covariance terms as random variables. The variance of the index fund return is forced to be below a low-risk threshold with a large probability, thereby limiting … Read more

    Portfolio Selection under Model Uncertainty: A Penalized Moment-Based Optimization Approach

  • Roy H. Kwon
  • Jonathan Y. Li
    • Categories Finance and Economics, Robust Optimization, Semi-definite Programming Tags ,

    We present a new approach for portfolio selection when the underlying distribution of asset returns is uncertain or ambiguous to investors. In particular, we consider the case that an investor can formulate some reference financial models based on his/her prior beliefs or information, but is concerned about misspecification of the reference models and the associated … Read more

    Consistency of robust optimization

  • Ralf Werner
    • Categories Finance and Economics, Robust Optimization

    In recent years the robust counterpart approach, introduced and made popular by Ben-Tal, Nemirovski and El Ghaoui, gained more and more interest among both academics and practitioners. However, to the best of our knowledge, only very few results on the relationship between the original problem instance and the robust counterpart have been established. This exposition … Read more

    Convex duality in stochastic programming and mathematical finance

  • Teemu Pennanen
    • Categories Convex and Nonsmooth Optimization, Finance and Economics, Stochastic Programming Tags , ,

    This paper proposes a general duality framework for the problem of minimizing a convex integral functional over a space of stochastic processes adapted to a given filtration. The framework unifies many well-known duality frameworks from operations research and mathematical finance. The unification allows the extension of some useful techniques from these two fields to a … Read more

    Dynamic Portfolio Optimization with Transaction Costs: Heuristics and Dual Bounds

  • David B. Brown
  • James E. Smith
    • Categories Applications - OR and Management Sciences, Dynamic Programming, Finance and Economics Tags ,

    We consider the problem of dynamic portfolio optimization in a discrete-time, finite-horizon setting. Our general model considers risk aversion, portfolio constraints (e.g., no short positions), return predictability, and transaction costs. This problem is naturally formulated as a stochastic dynamic program. Unfortunately, with non-zero transaction costs, the dimension of the state space is at least as … Read more

    On the Safety First portfolio selection

  • Serhiy Boyko
  • Vladimir I. Norkin
    • Categories Finance and Economics, Stochastic Programming Tags , , , ,

    A.D.Roy’s (1952) safety first (SF) approach to a financial portfolio selection is improved. Safety first means minimization of probability of poor returns. Improvement concerns a better estimation of the poor return probabilities by means of shortfall risk functions. Optimal SF-portfolio is sought similar to Roy’s geometric method but with a different efficient frontier. In case … Read more

    Development and Calibration of Currency Market Strategies by Global Optimization

  • Mustafa Çağlayan
  • János Pintér
    • Categories Finance and Economics, Global Optimization Applications, Optimization Software and Modeling Systems

    We have developed a new financial indicator – called the Interest Rate Differential Adjusted for Volatility (IRDAV) measure – to assist investors in currency markets. On a monthly basis, we rank currency pairs according to this measure and generate a basket of pairs with the highest IRDAV values. Under positive market conditions, an IRDAV based … Read more

    On mixed integer reformulations of monotonic probabilistic programming problems with discrete distributions

  • Vladimir I. Norkin
    • Categories (Mixed) Integer Nonlinear Programming, Finance and Economics, Stochastic Programming Tags , , , , ,

    The paper studies large scale mixed integer reformulation approach to stochastic programming problems containing probability and quantile functions, under assumption of discreteness of the probability distribution involved. Jointly with general sample approximation technique and contemporary mixed integer programming solvers the approach gives a regular framework to solution of practical probabilistic programming problems. In the literature … Read more