Solving long-term financial planning problems via global optimization

Costas D. Maranas, I. P. Androulakis, C. A. Floudas, A. J. Berger, J. M. Mulvey

Research output: Contribution to journalArticle

60 Citations (Scopus)

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 languageEnglish (US)
Pages (from-to)1405-1425
Number of pages21
JournalJournal of Economic Dynamics and Control
Volume21
Issue number8-9
StatePublished - Jun 29 1997

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Global optimization
Global Optimization
Planning
Decision Rules
Efficient Frontier
Sales
Computational Results
Optimization Algorithm
Proportion
Objective function
Chemical analysis
Demonstrate
Assets
Investment strategy
Decision rules
Financial planning
Strategy
Class
Portfolio composition
Efficient frontier

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics

Cite this

Maranas, C. D., Androulakis, I. P., Floudas, C. A., Berger, A. J., & Mulvey, J. M. (1997). Solving long-term financial planning problems via global optimization. Journal of Economic Dynamics and Control, 21(8-9), 1405-1425.
Maranas, Costas D. ; Androulakis, I. P. ; Floudas, C. A. ; Berger, A. J. ; Mulvey, J. M. / Solving long-term financial planning problems via global optimization. In: Journal of Economic Dynamics and Control. 1997 ; Vol. 21, No. 8-9. pp. 1405-1425.
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Maranas, CD, Androulakis, IP, Floudas, CA, Berger, AJ & Mulvey, JM 1997, 'Solving long-term financial planning problems via global optimization', Journal of Economic Dynamics and Control, vol. 21, no. 8-9, pp. 1405-1425.

Solving long-term financial planning problems via global optimization. / Maranas, Costas D.; Androulakis, I. P.; Floudas, C. A.; Berger, A. J.; Mulvey, J. M.

In: Journal of Economic Dynamics and Control, Vol. 21, No. 8-9, 29.06.1997, p. 1405-1425.

Research output: Contribution to journalArticle

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Maranas CD, Androulakis IP, Floudas CA, Berger AJ, Mulvey JM. Solving long-term financial planning problems via global optimization. Journal of Economic Dynamics and Control. 1997 Jun 29;21(8-9):1405-1425.