Applications of Heuristics in Finance

Manfred Gilli, Dietmar Maringer and Peter Winker
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Manfred Gilli: University of Geneva
Dietmar Maringer: University of Essex

Chapter 26 in Handbook on Information Technology in Finance, 2008, pp 635-653 from Springer

Abstract: Abstract Having the optimal solution for a given problem is crucial in the competitive world of finance; finding this optimal solution, however, is often an utter challenge. Even if the problem is well defined and all necessary data are available, it is not always well behaved: rather simple constraints are often enough to prohibit closed form solutions or evade the reliable application of standard numerical solutions. A common way to avoid this difficulty is to restate the problem: restricting and cumbersome constraints are relaxed and simplifying assumptions are introduced until the revised problem is approachable with the available methods, and are afterwards superimposed onto the solution for the simplified problem. Unfortunately, subtleties as well as central properties of the initial problem can be lost in this process, and results assumed to be ideal can actually be far away from the true optimum.

Keywords: Transaction Cost; Portfolio Optimization; GARCH Model; Sharpe Ratio; Capital Asset Price Model (search for similar items in EconPapers)
Date: 2008
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DOI: 10.1007/978-3-540-49487-4_26

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