New Operational Approaches for Financial Modelling by Jaime Gil-Aluja (auth.), Prof. Constantin Zopounidis (eds.)

By Jaime Gil-Aluja (auth.), Prof. Constantin Zopounidis (eds.)

th This booklet is dedicated to the nineteen assembly of the EURO operating workforce on monetary Modelling, held in Chania, Crete, Greece,November28-30, 1996. The EURO operating staff on monetary Modelling was once based in September 1986 in Lisbon. the first box of curiosity for the operating workforce may be defined as "the improvement of economic versions that support to resolve difficulties facedby monetary managers within the firm". From this standpoint, the next objectivesof the operating staff are unique: • supplying a global discussion board for alternate of knowledge and event on monetary modelling; • encouraging examine in monetary modelling (i. e. new ideas, methodologies, software,empirical studies,etc. ); • stimulating and strengthening the interplay among monetary monetary idea and the perform of economic selection making; • cooperating and changing info with universities and monetary associations all through Europe. based on the aboveobjectives,the simple objective of this e-book is to provide a few new operational methods (i. e. neural nets, multicriteria research, new optimization algorithms, determination software program, and so on. ) for monetary modelling, either in a theoretical and functional degrees. hence, the current quantity is split in 9 chapters. the 1st bankruptcy refers back to the new developments in monetary modelling and contains invited papers through Gil-Aluja and Pardalos. the second one bankruptcy contains papers related to excessive functionality computing and finance that is a eu union undertaking during which take part a few individuals of the EURO operating team on monetary Modelling (Spronk, Zenios, Dempster, and so forth. ).

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Finally, the model could be maximizing errors in the statistical description of the future. Dert (1995) has developed methods to eliminate arbitrage opportunities from a given set of scenarios. Without arbitrage opportunities, the model could still be following paths to optimality which are unreasonable in practice . Recognizing these pitfalls is crucial, because optimization will make a good portfolio manager better. and a bad one worse (Dahl et a1. 13). 4. E. (1995), A Hybrid Simulation/Optimization Scenario Model for AssetlLiability Management, Report 9513/A, Econometric Institute, Erasmus University Rotterdam.

Major problems (see [14]) when using the mean-variance formulation are : 1. Finding the variance-covariance matrix E , with its (~) covariance coeffi- cients . There is yet no structure that enables the estimation of covariances between all pairs of securities when considering a large number of securities. 2. Calculating the efficient frontier . 3. Solving for optimal portfolios on the efficient frontier . 2 Short sales Short sales allows Xi to be negative. The investor borrows stocks from a lender, promising to pay the lender all the dividends and the market price of the stocks at some time in the future .

The managers of the pension fund could devote themselves to keeping up with the solvency requirements. However, such an attitude may lead to a conservative short run policy. The regulating authorities check the solvency of a pension fund by comparing the market value of the asset portfolio with the present value of the liabilities. The present value of the liabilities is estimated by discounting the expected future benefit payments. g. mortality tables) is used . These nominal figures are discounted with a constant rate of 4%.

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