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Multi-period stochastic optimization models for dynamic asset allocation [An article from: Journal of Banking and Finance]
Book Details
Author(s)N. Hibiki
PublisherElsevier
ISBN / ASINB000RR6MSK
ISBN-13978B000RR6MS4
AvailabilityAvailable for download now
Sales Rank9,785,775
MarketplaceUnited States 🇺🇸
Description
This digital document is a journal article from Journal of Banking and Finance, published by Elsevier in . The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.
Description:
Institutional investors manage their strategic asset mix over time to achieve favorable returns subject to various uncertainties, policy and legal constraints, and other requirements. One may use a multi-period portfolio optimization model in order to determine an optimal asset mix. The concept of scenarios is typically employed for modeling random parameters in a multi-period stochastic programming model, and scenarios are constructed via a tree structure. Recently, an alternative stochastic programming model with simulated paths was proposed by Hibiki [Hibiki, N., 2001b. A hybrid simulation/tree multi-period stochastic programming model for optimal asset allocation. In: Takahashi, H. (Ed.), The Japanese Association of Financial Econometrics and Engineering. JAFEE Journal 89-119 (in Japanese); Hibiki, N., 2003. A hybrid simulation/tree stochastic optimization model for dynamic asset allocation. In: Scherer, B. (Ed.), Asset and Liability Management Tools: A Handbook for Best Practice, Risk Books, pp. 269-294], and it is called a hybrid model. The advantage of the simulated path structure compared to the tree structure is to give a better accuracy to describe uncertainties of asset returns. In this paper, we compare the two types of multi-period stochastic optimization models, and clarify that the hybrid model can evaluate and control risk better than the scenario tree model using some numerical tests. According to the numerical results, an efficient frontier of the hybrid model with the fixed-proportion strategy dominates that of the scenario tree model when we evaluate them on simulated paths. Moreover, optimal solutions of the hybrid model are more appropriate than those of the scenario tree model.
Description:
Institutional investors manage their strategic asset mix over time to achieve favorable returns subject to various uncertainties, policy and legal constraints, and other requirements. One may use a multi-period portfolio optimization model in order to determine an optimal asset mix. The concept of scenarios is typically employed for modeling random parameters in a multi-period stochastic programming model, and scenarios are constructed via a tree structure. Recently, an alternative stochastic programming model with simulated paths was proposed by Hibiki [Hibiki, N., 2001b. A hybrid simulation/tree multi-period stochastic programming model for optimal asset allocation. In: Takahashi, H. (Ed.), The Japanese Association of Financial Econometrics and Engineering. JAFEE Journal 89-119 (in Japanese); Hibiki, N., 2003. A hybrid simulation/tree stochastic optimization model for dynamic asset allocation. In: Scherer, B. (Ed.), Asset and Liability Management Tools: A Handbook for Best Practice, Risk Books, pp. 269-294], and it is called a hybrid model. The advantage of the simulated path structure compared to the tree structure is to give a better accuracy to describe uncertainties of asset returns. In this paper, we compare the two types of multi-period stochastic optimization models, and clarify that the hybrid model can evaluate and control risk better than the scenario tree model using some numerical tests. According to the numerical results, an efficient frontier of the hybrid model with the fixed-proportion strategy dominates that of the scenario tree model when we evaluate them on simulated paths. Moreover, optimal solutions of the hybrid model are more appropriate than those of the scenario tree model.
