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Cardinality-Constrained Higher-Order Moment Portfolios Using Particle Swarm Optimization

Mulazim-Ali Khokhar (), Kris Boudt and Chunlin Wan
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Mulazim-Ali Khokhar: Vrije Universiteit Brussel
Chunlin Wan: Sichuan University

Chapter Chapter 10 in Applying Particle Swarm Optimization, 2021, pp 169-187 from Springer

Abstract: Abstract Particle swarm optimization (PSO) is often used for solving cardinality-constrained portfolio optimization problems. The system invests in at most k out of N possible assets using a binary mapping that enforces compliance with the cardinality constraint. This may lead to sparse solution vectors driving the velocity in PSO algorithm. This sparse-velocity mapping leads to early stagnation in mean-variance-skewness-kurtosis expected utility optimization when k is small compared to N. A continuous-velocity driver addresses this issue. We propose to combine both the continuous- and the sparse-velocity transformation methods so that it updates local and global best positions based on both the drivers. We document the performance gains when k is small compared to N in the case of mean-variance-skewness-kurtosis expected utility optimization of the portfolio.

Keywords: Particle swarm optimization; Cardinality mapping; Higher-order moment portfolio (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/978-3-030-70281-6_10

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