Variable neighborhood search heuristic for nonconvex portfolio optimization

Andrijana Bačević, Nemanja Vilimonović, Igor Dabić, Jakov Petrović, Darko Damnjanović and Dušan Džamić

The Engineering Economist, 2019, vol. 64, issue 3, 254-274

Abstract: In this article we consider a portfolio optimization problem under multiple real-world constraints, such as: cardinality constraints, tracking error, active share, and turnover. We propose a heuristic based on variable neighborhood search (VNS) that effectively addresses additional constraints that introduce non-convexities. In the VNS-based heuristic, several neighborhood structures are introduced and fast local search is implemented. We develop a VNS portfolio rebalancing framework (VNS-PRF) with two rebalance strategies. Data sets provided by a financial investment firm are used to evaluate the validity and reliability of the proposed VNS-PRF. Computational experiments and different portfolio performance measures indicate that our approach is able to obtain solutions with competitive quality and can be applied on large-scale data sets.

Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:taf:uteexx:v:64:y:2019:i:3:p:254-274

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DOI: 10.1080/0013791X.2019.1619888

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