A Local Search Approach to Solve a Financial Portfolio Design Problem

Fatima Zohra Lebbah and Yahia Lebbah
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Fatima Zohra Lebbah: LITIO Laboratory, University of Oran, Oran, Algeria and Science and Techniques Preparatory School of Oran, Oran, Algeria
Yahia Lebbah: LITIO Laboratory, University of Oran, Oran, Algeria

International Journal of Applied Metaheuristic Computing (IJAMC), 2015, vol. 6, issue 2, 1-17

Abstract: This paper introduces a local search optimization technique for solving efficiently a financial portfolio design problem which consists to affect assets to portfolios, allowing a compromise between maximizing gains and minimizing losses. This practical problem appears usually in financial engineering, such as in the design of CDO-squared portfolios. This problem has been modeled by Flener et al. who proposed an exact method to solve it. It can be formulated as a quadratic program on the 0-1 domain. It is well known that exact solving approaches on difficult and large instances of quadratic integer programs are known to be inefficient. That is why this work has adopted a local search method. It proposes neighborhood and evaluation functions specialized on this problem. To boost the local search process, it also proposes a greedy algorithm to start the search with an optimized initial configuration. Experimental results on non-trivial instances of the problem show the effectiveness of this work's approach.

Date: 2015
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