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Warm-Start Heuristic for Stochastic Portfolio Optimization with Fixed and Proportional Transaction Costs

Tiago P. Filomena (tpfilomena@ea.ufrgs.br) and Miguel Lejeune
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Tiago P. Filomena: Federal University of Rio Grande do Sul

Journal of Optimization Theory and Applications, 2014, vol. 161, issue 1, No 16, 308-329

Abstract: Abstract We consider a probabilistic portfolio optimization model including fixed and proportional transaction costs. We derive a deterministic equivalent of the probabilistic model for fat-tailed portfolio returns. We develop a method which finds provably near-optimal solutions in minimal amount of time for industry-sized (up to 2000 assets) problems. To solve the mixed-integer nonlinear programming (MINLP) deterministic formulation equivalent to the stochastic problem, we design a mathematical programming-based warm-start heuristic. The tests show the computational efficiency of the heuristic which is more than an order of magnitude faster than Cplex in finding high-quality solutions.

Keywords: Large-scale optimization; Stochastic programming; Portfolio optimization; Transaction costs; Fat-tailed returns (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (7)

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DOI: 10.1007/s10957-013-0348-y

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