Prospect theory-based formulation of chance constrained portfolio optimization problem using loan
Portfolio optimization that allows the borrowed money from a loan to be invested in risk assets has been formulated as a chance constrained problem. In this paper, in order to reflect investor preferences called “values” in the solution, or the portfolio, prospect theory is used to expand the chance...
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| Format: | Article |
| Language: | English |
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Taylor & Francis Group
2024-12-01
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| Series: | SICE Journal of Control, Measurement, and System Integration |
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| Online Access: | http://dx.doi.org/10.1080/18824889.2024.2347030 |
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| _version_ | 1846124634017103872 |
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| author | Kiyoharu Tagawa Yukiko Orito |
| author_facet | Kiyoharu Tagawa Yukiko Orito |
| author_sort | Kiyoharu Tagawa |
| collection | DOAJ |
| description | Portfolio optimization that allows the borrowed money from a loan to be invested in risk assets has been formulated as a chance constrained problem. In this paper, in order to reflect investor preferences called “values” in the solution, or the portfolio, prospect theory is used to expand the chance constrained problem that maximizes the profit. The new portfolio optimization problem maximizes the value instead of the profit. In order to get a deeper understanding of the characteristics of the new portfolio optimization problem, the fitness landscape analysis method using Convex-Hull Mapping (CHM) is employed. Furthermore, since the new portfolio optimization problem is usually non-convex, the multi-start local search method with CHM is used to find the solution. Finally, numerical experiments on artificial and actual asset data sets show that the solution of the new portfolio optimization problem is more acceptable to investors than the solution of the conventional one. |
| format | Article |
| id | doaj-art-220d7fd8d9c54592b1fa7d639a74d68f |
| institution | Kabale University |
| issn | 1884-9970 |
| language | English |
| publishDate | 2024-12-01 |
| publisher | Taylor & Francis Group |
| record_format | Article |
| series | SICE Journal of Control, Measurement, and System Integration |
| spelling | doaj-art-220d7fd8d9c54592b1fa7d639a74d68f2024-12-13T15:19:03ZengTaylor & Francis GroupSICE Journal of Control, Measurement, and System Integration1884-99702024-12-0117117619310.1080/18824889.2024.23470302347030Prospect theory-based formulation of chance constrained portfolio optimization problem using loanKiyoharu Tagawa0Yukiko Orito1Kindai UniversityTamagawa UniversityPortfolio optimization that allows the borrowed money from a loan to be invested in risk assets has been formulated as a chance constrained problem. In this paper, in order to reflect investor preferences called “values” in the solution, or the portfolio, prospect theory is used to expand the chance constrained problem that maximizes the profit. The new portfolio optimization problem maximizes the value instead of the profit. In order to get a deeper understanding of the characteristics of the new portfolio optimization problem, the fitness landscape analysis method using Convex-Hull Mapping (CHM) is employed. Furthermore, since the new portfolio optimization problem is usually non-convex, the multi-start local search method with CHM is used to find the solution. Finally, numerical experiments on artificial and actual asset data sets show that the solution of the new portfolio optimization problem is more acceptable to investors than the solution of the conventional one.http://dx.doi.org/10.1080/18824889.2024.2347030portfolio optimization problemchance constrained problemoptimization methodconstraint-handlingprospect theory |
| spellingShingle | Kiyoharu Tagawa Yukiko Orito Prospect theory-based formulation of chance constrained portfolio optimization problem using loan SICE Journal of Control, Measurement, and System Integration portfolio optimization problem chance constrained problem optimization method constraint-handling prospect theory |
| title | Prospect theory-based formulation of chance constrained portfolio optimization problem using loan |
| title_full | Prospect theory-based formulation of chance constrained portfolio optimization problem using loan |
| title_fullStr | Prospect theory-based formulation of chance constrained portfolio optimization problem using loan |
| title_full_unstemmed | Prospect theory-based formulation of chance constrained portfolio optimization problem using loan |
| title_short | Prospect theory-based formulation of chance constrained portfolio optimization problem using loan |
| title_sort | prospect theory based formulation of chance constrained portfolio optimization problem using loan |
| topic | portfolio optimization problem chance constrained problem optimization method constraint-handling prospect theory |
| url | http://dx.doi.org/10.1080/18824889.2024.2347030 |
| work_keys_str_mv | AT kiyoharutagawa prospecttheorybasedformulationofchanceconstrainedportfoliooptimizationproblemusingloan AT yukikoorito prospecttheorybasedformulationofchanceconstrainedportfoliooptimizationproblemusingloan |