Solving the multi-stage portfolio optimization problem with a novel particle swarm optimization

Authors:
Jun Sun;Wei Fang;Xiaojun Wu;Choi-Hong Lai;Wenbo Xu
Affiliations:
School of Information Technology, Jiangnan University, No. 1800, Lihu Avenue, Wuxi, Jiangsu 214122, China;School of Information Technology, Jiangnan University, No. 1800, Lihu Avenue, Wuxi, Jiangsu 214122, China;School of Information Technology, Jiangnan University, No. 1800, Lihu Avenue, Wuxi, Jiangsu 214122, China;School of Computing and Mathematical Sciences, University of Greenwich, Greenwich, London SE10 9LS, UK;School of Information Technology, Jiangnan University, No. 1800, Lihu Avenue, Wuxi, Jiangsu 214122, China
Venue:
Expert Systems with Applications: An International Journal
Year:
2011

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Abstract

Solving the multi-stage portfolio optimization (MSPO) problem is very challenging due to nonlinearity of the problem and its high consumption of computational time. Many heuristic methods have been employed to tackle the problem. In this paper, we propose a novel variant of particle swarm optimization (PSO), called drift particle swarm optimization (DPSO), and apply it to the MSPO problem solving. The classical return-variance function is employed as the objective function, and experiments on the problems with different numbers of stages are conducted by using sample data from various stocks in S&P 100 index. We compare performance and effectiveness of DPSO, particle swarm optimization (PSO), genetic algorithm (GA) and two classical optimization solvers (LOQO and CPLEX), in terms of efficient frontiers, fitness values, convergence rates and computational time consumption. The experiment results show that DPSO is more efficient and effective in MSPO problem solving than other tested optimization tools.