Abstract
A significant multi-stage financial planning problem is posed as a stochastic program with decision rules. The decision rule - called dynamically balanced - requires the purchase and sale of assets at each time stage so as to keep constant asset proportions in the portfolio composition. It leads to a nonconvex objective function. We show that the rule performs well as compared with other dynamic investment strategies. We specialize a global optimization algorithm for this problem class - guaranteeing finite ε-optimal convergence. Computational results demonstrate the procedure's efficiency on a real-world financial planning problem. The tests confirm that local optimizers are prone to erroneously underestimate the efficient frontier. The concepts can be readily extended for other classes of long-term investment strategies.
Original language | English (US) |
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Pages (from-to) | 1405-1425 |
Number of pages | 21 |
Journal | Journal of Economic Dynamics and Control |
Volume | 21 |
Issue number | 8-9 |
DOIs | |
State | Published - Jun 29 1997 |
All Science Journal Classification (ASJC) codes
- Economics and Econometrics
- Control and Optimization
- Applied Mathematics
Keywords
- Financial planning problems
- Fixed-mix problem
- Global optimization algorithm