We propose a hybrid variant of the level-based learning swarm optimizer (LLSO) for solving large-scale portfolio optimization problems. This solver fills the gap due to the inadequacy of the particle swarm optimization algorithm for high-dimensional instances. We aim to extend the classical mean-variance formulation by maximizing a modified version of the Sharpe ratio subject to cardinality, box, and budget constraints. The algorithm involves a projection operator to deal with these three constraints simultaneously. Further, we implicitly control transaction costs thanks to a rebalancing constraint handled by a suitable exact penalty function. In addition, we develop an ad hoc mutation operator to modify candidate exemplars in the highest level of the swarm. The experimental results, using three large-scale data sets, show that including this procedure improves the accuracy of the solutions. Then, a comparison with other variants of the LLSO algorithm and two state-of-the-art swarm optimizers points out the outstanding performance of the proposed solver in terms of exploration capabilities and solution quality. Finally, we assess the profitability of the portfolio allocation strategy in the last five years using an investable pool of 1119 constituents from the MSCI World Index.

A hybrid level-based learning swarm algorithm with mutation operator for solving large-scale cardinality-constrained portfolio optimization problems

Kaucic M.
;
Piccotto F.;Sbaiz G.;Valentinuz G.
2023-01-01

Abstract

We propose a hybrid variant of the level-based learning swarm optimizer (LLSO) for solving large-scale portfolio optimization problems. This solver fills the gap due to the inadequacy of the particle swarm optimization algorithm for high-dimensional instances. We aim to extend the classical mean-variance formulation by maximizing a modified version of the Sharpe ratio subject to cardinality, box, and budget constraints. The algorithm involves a projection operator to deal with these three constraints simultaneously. Further, we implicitly control transaction costs thanks to a rebalancing constraint handled by a suitable exact penalty function. In addition, we develop an ad hoc mutation operator to modify candidate exemplars in the highest level of the swarm. The experimental results, using three large-scale data sets, show that including this procedure improves the accuracy of the solutions. Then, a comparison with other variants of the LLSO algorithm and two state-of-the-art swarm optimizers points out the outstanding performance of the proposed solver in terms of exploration capabilities and solution quality. Finally, we assess the profitability of the portfolio allocation strategy in the last five years using an investable pool of 1119 constituents from the MSCI World Index.
2023
22-mar-2023
Pubblicato
https://www.sciencedirect.com/science/article/abs/pii/S0020025523004371
File in questo prodotto:
File Dimensione Formato  
1-s2.0-S0020025523004371-main.pdf

accesso aperto

Tipologia: Documento in Versione Editoriale
Licenza: Creative commons
Dimensione 1.83 MB
Formato Adobe PDF
1.83 MB Adobe PDF Visualizza/Apri
1-s2.0-S0020025523004371-mmc1.pdf

accesso aperto

Descrizione: suppl. mat.
Tipologia: Altro materiale allegato
Licenza: Creative commons
Dimensione 803.5 kB
Formato Adobe PDF
803.5 kB Adobe PDF Visualizza/Apri
Pubblicazioni consigliate

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11368/3042778
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus 6
  • ???jsp.display-item.citation.isi??? 3
social impact