SPIN GLASSES IN THE TRADING BOOK

I. Kondor
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I. Kondor: Department of Physics of Complex Systems, Eötvös University, 1518 Budapest, Pf. 32, Hungary;

International Journal of Theoretical and Applied Finance (IJTAF), 2000, vol. 03, issue 03, 537-540

Abstract: The standard model defined in the Capital Adequacy Directive issued by the EEC in 1993 imposes nonlinear constraints on certain parts of the trading portfolios of financial institutions. It is shown that an institution that complies with the rules of the standard model but wants to optimize its portfolio according to some internal criteria, such as minimizing the variance or the VaR, faces a computational problem equivalent to finding the ground states of a long range spin glass. This problem is known to be NP-complete, and to have exponentially many solutions which are extremely sensitive to any changes of the input parameters.

Keywords: Capital adequacy; portfolios; nonlinear constraints; spin glasses (search for similar items in EconPapers)
Date: 2000
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DOI: 10.1142/S0219024900000516

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