Effective algorithms for optimal portfolio deleveraging problem with cross impact

DOI10.1111/MAFI.12383MaRDI QIDQ6178391zbMATH OpenOpenAlexFDO

Authors

Publication date 18 January 2024

Published in Mathematical Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2012.07368

zbMATH Keywords

convex relaxationbranch-and-boundnonconvex quadratic programsuccessive convex optimizationoptimal portfolio deleveragingcross-asset price impact

Mathematics Subject Classification ID

Convex programming (90C25) Portfolio theory (91G10)

Abstract: We investigate the optimal portfolio deleveraging (OPD) problem with permanent and temporary price impacts, where the objective is to maximize equity while meeting a prescribed debt/equity requirement. We take the real situation with cross impact among different assets into consideration. The resulting problem is, however, a non-convex quadratic program with a quadratic constraint and a box constraint, which is known to be NP-hard. In this paper, we first develop a successive convex optimization (SCO) approach for solving the OPD problem and show that the SCO algorithm converges to a KKT point of its transformed problem. Second, we propose an effective global algorithm for the OPD problem, which integrates the SCO method, simple convex relaxation and a branch-and-bound framework, to identify a global optimal solution to the OPD problem within a pre-specified $epsilon$-tolerance. We establish the global convergence of our algorithm and estimate its complexity. We also conduct numerical experiments to demonstrate the effectiveness of our proposed algorithms with both the real data and the randomly generated medium- and large-scale OPD problem instances.

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Cited in

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