Markov chain portfolio liquidity optimization model

Main Article Content

Eder Oliveira Abensur

Abstract

The international financial crisis of September 2008 and May 2010 showed the importance of liquidity as an attribute to be considered in portfolio decisions. This study proposes an optimization model based on available public data, using Markov chain and Genetic Algorithms concepts as it considers the classic duality of risk versus return and incorporating liquidity costs. The work intends to propose a multi-criterion non-linear optimization model using liquidity based on a Markov chain. The non-linear model was tested using Genetic Algorithms with twenty five Brazilian stocks from 2007 to 2009. The results suggest that this is an innovative development methodology and useful for developing an efficient and realistic financial portfolio, as it considers many attributes such as risk, return and liquidity.

Downloads

Download data is not yet available.

Metrics

Metrics Loading ...

Article Details

Section
Articles
Author Biography

Eder Oliveira Abensur, Universidade Federal do ABC (UFABC)

Eder Oliveira Abensur, PHD, Universidade Federal do ABC (UFABC), Santo André, SP, Brazil

Currently professor of Operations Research and Economics Engineering of the course of Production Engineering

email: eder.abensur@ufabc.edu.br

Tel: 55 11 99239-5021

References

AMIHUD, Y.; MENDELSON, H. (1991) Liquidity, Asset Prices and Financial Policy. Financial Analysts Journal, v. 47, n. 6, p. 56-66.

ARNOTT, R. D.; WAGNER, W. H. (1990) The Measurement and Control of Trading Costs. Financial Analysts Journal, v. 46, n. 6, p. 73-80.

BANZ, R. W. (1981) The Relationship between Return and Market Value of Common Stocks. Journal of Financial Economics, v. 9, n. 1, p. 3-18.

BAUERLE, N.; RIEDER, N. (2004) Portfolio Optimization with Markov Modulated Stock Prices and Interest Rates. IEEE Transactions on Automatic Control, v. 49, n. 3, p. 442-447.

BMF&Bovespa. Daily Bulletin of Business. Available: http://www.bovespa.com.br. Access: 16 September 2012

CAKMAK, U.; OZEKICI, S. (2006) Portfolio Optimization in Stochastic Markets, Mathematical Methods of Operations Research, v. 63, n. 1, p. 151-168.

COSTA, O. L. V.; ARAUJO, M. V. (2008) A Generalized Multi-period Mean Variance Portfolio Optimization with Markov Switching Parameters. Automatica, v. 44, n. 10, p. 2487-2497.

FAMA, E. F.; FRENCH, K. R. (1992) The Cross-section of Expected Stock Returns. Journal of Finance, v. 47, n. 2, p. 427- 465.

GOYENCO, R. Y.; HOLDEN, C. W.; TRZCINKA, C. A. (2009) Do Liquidity Measures Measure Liquidity? Journal of Financial Economics, v. 92, n. 2, p. 153-181.

HESTON, S. L.; SADKA, R. (2008) Seasonability in the Cross-Section of Stock Returns. Journal of Financial Economics, v. 87, n. 2, p. 418-445.

HILLIER, F. S.; LIEBERMAN, G. J. (2005) Introduction to Operations Research. Columbus: McGraw-Hill.

HOGAN, S. (2004). Testing Market Efficiency using Statistical Arbitrage with Applications to Momentum and Value Strategies. Journal of Financial Economics, v. 73, n. 3, p. 525-564.

HOLLAND, J. H. (1975) Adaptation in Natural and Artificial Systems. Ann Arbor: The University of Michigan Press.

JANA, P.; ROY, T. K.; MAZUMDER, S. K. (2009) Multi-objective possibilistic Model for Portfolio Selection with Transaction Cost. Journal of Computational and Applied Mathematics, v. 228, n. 1, p. 188-196.

KONNO, H.; YAMAZAKI, H. (1991) Mean-absolute Deviation Portfolio Optimization Model and its Applications to Tokio Stock Market. Management Science, v. 37, n. 5, p. 519-531.

LESMOND, D. A. (2005) Liquidity of Emerging Markets. Journal of Financial Economics, v. 77, n. 2, p. 411-452.

LEWELLEN, J. (2006) The Conditional CAPM does not Explain Asset-Pricing Anomalies. Journal of Financial Economics, v. 82, n. 2, p. 289-314.

MARKOWITZ, H. (1952) Portfolio Selection. Journal of Finance, v. 7, n. 1, p. 77-91.

PARRA, M. A.; TEROL, B.; URIA, M. V. R. (2001) A Fuzzy Goal Programming Approach to Portfolio Selection. European Journal of Operational Research, v. 133, n. 2, p. 287-297.

PAULA LEITE, H.; SANVINCENTE, A. Z. (1995) Índice BOVESPA: Um Padrão para os Investimentos Brasileiros. São Paulo: Atlas.

POGUE, G. A. (1970) An Extension of the Markowitz Portfolio Selection Model to Include Variable Transactions’ Costs, Short Sales, Leverage Policies and Taxes. Journal of Finance, v. 25, n. 5, p. 1005-1027.

REBOREDO, J. C. (2002) Bank Solvency Evaluation with a Markov Model. Applied Financial Economics, v. 12, n. 5, p. 337-345.

ROSS, A. S.; WESTERFIELDd, R. W.; JAFFE, J. F. (1999) Corporate Finance. Columbus: McGraw-Hill.

SHARPE, W. (1964) Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. Journal of Finance, v. 19, n. 3, p. 425-442.

TAHA, H. A. (2008) Operations Research: an Introduction. New York: Prentice Hall.

YOUNG, M. R. (1998) A Minimax Portfolio Selection Rule with Linear Programming Solution. Management Science, v. 44, n. 5, p. 673-683.