Advertisement

Application of Two-Stage Stochastic Linear Program for Portfolio Selection Problem

  • Kuo-Hwa Chang
  • Huifen Chen
  • Ching-Fen Lin
Part of the Lecture Notes in Computer Science book series (LNCS, volume 3982)

Abstract

We consider a portfolio selection problem under the consideration of dynamic closing time of the portfolio. The selection strategy is to take the long position on the stocks and the short position on an index future. We will close our portfolio whenever our profit exceeds the predetermined target during the investment period, otherwise, we will own the portfolio till the maturity date of the future. Our purpose is to have a profitable portfolio with steady return which is higher than the interest rate of savings and independent of the market. To deal with the stocks selection problem and, at the same time, the uncertainty on the closing time due to the fluctuation of the market, we define the corresponding optimization problem as a two-stage stochastic linear program (two-stage SLP). Our models are tested by the real-world data and the results are consistent with what we expected.

Keywords

Portfolio selection Futures Two-stage stochastic linear program 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. 1.
    Cai, X., Teo, K.L., Yang, X., Zhou, X.Y.: Portfolio Optimization under A Minimax Rule. Management Science 46(7), 957–972 (2000)CrossRefGoogle Scholar
  2. 2.
    Chang, K.-H., Chen, H.-J., Liu, C.-Y.: A Stochastic Programming Model For Portfolio Selection. Journal of the Chinese Institute of Industrial Engineers 19(3), 31–41 (2002)CrossRefGoogle Scholar
  3. 3.
    Chang, K.-H.: Safety-First Portfolio Selection Problem with Index Future. Technical report, Dept. of Industrial Engineering, Chung Yuan Christian University (2004)Google Scholar
  4. 4.
    Elton, E.J., Gruber, M.J.: Modern Portfolio Theory and Investment Analysis. John Wiley and Sons, New York (1995)Google Scholar
  5. 5.
    Higle, J.L., Sen, S.: Stochastic Decomposition. Kluwer Academic Publishers, Dordrecht (1996)zbMATHGoogle Scholar
  6. 6.
    Kane, A.: Skewness Preference and Portfolio Choice. Journal of Financial and Quantitative Analysis 17, 15–25 (1982)CrossRefGoogle Scholar
  7. 7.
    Konno, H., Yamazaki, H.: Mean-Absolute Deviation Portfolio Optimization Model and Its Applications to Tokyo Stock Market. Management science 37(5), 519–531 (1991)CrossRefGoogle Scholar
  8. 8.
    Konno, H., Kobayashi, K.: An Integrated Stock-Bond Portfolio Optimization Model. Journal of Economic Dynamics and Control 21, 1427–1444 (1997)zbMATHCrossRefMathSciNetGoogle Scholar
  9. 9.
    Konno, H., Shirakawa, H., Yamazaki, H.: A Mean-absolute Deviation-Skewness Portfolio Optimization Model. Annals of Operations Research 45, 205–220 (1993)zbMATHCrossRefMathSciNetGoogle Scholar
  10. 10.
    Kouwenberg, R.: Scenario Generation and Stochastic Programming Models for Asset Liability Management. European Journal of Operational Research 134, 279–292 (2001)zbMATHCrossRefMathSciNetGoogle Scholar
  11. 11.
    Markowitz, H.M.: Portfolio Selection. Journal of Finance 7, 77–91 (1952)CrossRefGoogle Scholar
  12. 12.
    Telser, L.G.: Safety First and Hedging. Review of Economics Studies 23, 1–16 (1955)CrossRefGoogle Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2006

Authors and Affiliations

  • Kuo-Hwa Chang
    • 1
  • Huifen Chen
    • 1
  • Ching-Fen Lin
    • 1
  1. 1.Department of Industrial EngineeringChung Yuan Christian UniversityChung-LiTaiwan

Personalised recommendations