Journal ArticleDOI
Mean-absolute deviation portfolio optimization for mortgage-backed securities
Stavros A. Zenios,Pan Kang +1 more
TLDR
An integrated simulation/optimization model for managing portfolios of mortgage-backed securities using amean-absolute deviation model which is consistent with the asymmetric distribution of returns of mortgage securities and derivative products is developed.Abstract:
We develop an integrated simulation/optimization model for managing portfolios of mortgage-backed securities. The mortgage portfolio problem is viewed in the same spirit of models used for the management of portfolios of equities. That is, it trades off rates of return with a suitable measure of risk. In this respect we employ amean-absolute deviation model which is consistent with the asymmetric distribution of returns of mortgage securities and derivative products. We develop a simulation procedure to compute holding period returns of the mortgage securities under a range of interest rate scenarios. The simulation explicitly takes into account the stylized facts of mortgage securities: the propensity of homeowners to prepay their mortgages, and theoption adjusted premia associated with these securities. Details of both the simulation and optimization models are presented. The model is then applied to the funding of a typical insurance liability stream, and it is shown to generate superior results than the standardportfolio immunization approach.read more
Citations
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Robust Optimization of Large-Scale Systems
TL;DR: This paper characterize the desirable properties of a solution to models, when the problem data are described by a set of scenarios for their value, instead of using point estimates, and develops a general model formulation, called robust optimization RO, that explicitly incorporates the conflicting objectives of solution and model robustness.
Journal ArticleDOI
From stochastic dominance to mean-risk models: Semideviations as risk measures
TL;DR: It is shown that the standard semideviation (square root of the semivariance) as the risk measure makes the mean-risk model consistent with the second degree stochastic dominance, provided that the trade-off coefficient is bounded by a certain constant.
Journal ArticleDOI
Markowitz Revisited: Mean-Variance Models in Financial Portfolio Analysis
TL;DR: The interplay between objective and constraints in a number of single-period variants, including semivariance models are described, revealing the possibility of removing surplus money in future decisions, yielding approximate downside risk minimization.
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Heuristic algorithms for the portfolio selection problem with minimum transaction lots
TL;DR: This paper shows that in this case the problem of finding a feasible solution to the portfolio problem with minimum transaction lots is NP-complete, independently of the risk function.
Journal ArticleDOI
Twenty years of linear programming based portfolio optimization
TL;DR: This paper reviews the variety of LP solvable portfolio optimization models presented in the literature, the real features that have been modeled and the solution approaches to the resulting models, in most of the cases mixed integer linear programming (MILP) models.
References
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Journal ArticleDOI
A Theory of the Term Structure of Interest Rates.
TL;DR: In this paper, the authors use an intertemporal general equilibrium asset pricing model to study the term structure of interest rates and find that anticipations, risk aversion, investment alternatives, and preferences about the timing of consumption all play a role in determining bond prices.
Journal ArticleDOI
Mean-absolute deviation portfolio optimization model and its applications to Tokyo stock market
Hiroshi Konno,Hiroaki Yamazaki +1 more
TL;DR: In this article, a portfolio optimization model using the L1 risk (mean absolute deviation risk) function can remove most of the difficulties associated with the classical Markowitz's model while maintaining its advantages over equilibrium models.
Journal ArticleDOI
A One-Factor Model of Interest Rates and Its Application to Treasury Bond Options
TL;DR: In this article, a one-factor model of interest rates and its application to Treasury bond options is presented, with a focus on the use of options as an alternative to bonds.
Journal ArticleDOI
Prepayment and the Valuation of Mortgage-Backed Securities
TL;DR: In this article, the authors put forward a valuation framework for mortgage-backed securities consistent with these stylized facts associated with mortgage prepayments, but they do not impose an optimal, value-minimizing call condition to price these securities.
Journal ArticleDOI
Mean-Absolute-Deviation Characteristic Lines for Securities and Portfolios
TL;DR: In this paper, the authors presented a new algorithm for minimizing the sum of the absolute deviations of a security portfolio rather than the squared deviations around the characteristic line of the portfolio, which produces useful information as a byproduct of the solution process.
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