Effect of Supplementary Premium on the Optimal Portfolio Policy in a Defined Contribution Pension Scheme with Refund of Premium Clauses

In this paper, we studied the effect of supplementary premium on the optimal portfolio policy in a defined contribution (DC) pension scheme with refund of premium clauses. This refund clause allows death members’ next of kin to withdraw their relative’s accumulated wealth during the accumulation period. The supplementary premium is to help sustain the scheme and is assumed to be stochastic. We considered cases when the remaining wealth is equally distributed and when it is not equally distributed among the remaining members. Next, we considered investments in cash and equity to help increase the remaining accumulated funds to meet up with the retirement needs of the remaining members and composed the problem as a continuous time mean-variance stochastic optimal control problem using the actuarial symbol and established an optimization problem from the extended Hamilton Jacobi Bellman equations. The optimal portfolio policy, the corresponding optimal fund size for the two assets and also the efficient frontier of the pension members for the two cases was obtained. Furthermore, the numerical simulations of the optimal portfolio policies with time were presented and the effect of the supplementary premium on the optimal portfolio policy was discussed and observed that the supplementary premium decreases the optimal portfolio policy of the risky asset (equity). Secondly we observed a disparity between the optimal policies for the two cases.

Mean-Variance Optimization of Portfolios with Return of Premium Clauses in a DC Pension Plan with Multiple Contributors under Constant Elasticity of Variance Model

In this paper, mean-variance optimization of portfolios with the return of premium clauses in a defined contribution (DC) pension plan with multiple contributors under constant elasticity of variance (CEV) model is studied. The return clauses which permit death members to claim their accumulated wealth are considered, the remaining wealth is not equally distributed by the remaining members as in literature. We assume that before investment, the surplus which includes funds of members who died after retirement adds to the total wealth. Next, we consider investments in a risk-free asset and a risky asset to meet up the expected returns of the remaining members and obtain an optimized problem with the help of extended Hamilton Jacobi Bellman equation. We obtained the optimal investment strategies for the two assets and the efficient frontier of the members by using a stochastic optimal control technique. Furthermore, we studied the effect of the various parameters of the optimal investment strategies and the effect of the risk-averse level on the efficient frontier. We observed that the optimal investment strategy is the same as in literature, secondly, we observed that the surplus decreases the proportion of the wealth invested in the risky asset.

Cost Efficiency of European Cooperative Banks

This paper analyzes recent trends in cost efficiency of European cooperative banks using efficient frontier analysis. Our methodology is based on stochastic frontier analysis which is run on a set of 649 European cooperative banks using data between 2006 and 2015. Our results show that average inefficiency of European cooperative banks is increasing since 2008, smaller cooperative banks are significantly more efficient than the bigger ones over the whole time period and that share of net fee and commission income to total income surprisingly seems to have no impact on bank cost efficiency.

Searching the Efficient Frontier for the Coherent Covering Location Problem

In this article, we will try to find an efficient boundary approximation for the bi-objective location problem with coherent coverage for two levels of hierarchy (CCLP). We present the mathematical formulation of the model used. Supported efficient solutions and unsupported efficient solutions are obtained by solving the bi-objective combinatorial problem through the weights method using a Lagrangean heuristic. Subsequently, the results are validated through the DEA analysis with the GEM index (Global efficiency measurement).

Efficient Frontier - Comparing Different Volatility Estimators

Modern Portfolio Theory (MPT) according to Markowitz states that investors form mean-variance efficient portfolios which maximizes their utility. Markowitz proposed the standard deviation as a simple measure for portfolio risk and the lower semi-variance as the only risk measure of interest to rational investors. This paper uses a third volatility estimator based on intraday data and compares three efficient frontiers on the Croatian Stock Market. The results show that range-based volatility estimator outperforms both mean-variance and lower semi-variance model.

The Impact of Transaction Costs on Rebalancing an Investment Portfolio in Portfolio Optimization

Constructing a portfolio of investments is one of the most significant financial decisions facing individuals and institutions. In accordance with the modern portfolio theory maximization of return at minimal risk should be the investment goal of any successful investor. In addition, the costs incurred when setting up a new portfolio or rebalancing an existing portfolio must be included in any realistic analysis. In this paper rebalancing an investment portfolio in the presence of transaction costs on the Croatian capital market is analyzed. The model applied in the paper is an extension of the standard portfolio mean-variance optimization model in which transaction costs are incurred to rebalance an investment portfolio. This model allows different costs for different securities, and different costs for buying and selling. In order to find efficient portfolio, using this model, first, the solution of quadratic programming problem of similar size to the Markowitz model, and then the solution of a linear programming problem have to be found. Furthermore, in the paper the impact of transaction costs on the efficient frontier is investigated. Moreover, it is shown that global minimum variance portfolio on the efficient frontier always has the same level of the risk regardless of the amount of transaction costs. Although efficient frontier position depends of both transaction costs amount and initial portfolio it can be concluded that extreme right portfolio on the efficient frontier always contains only one stock with the highest expected return and the highest risk.

Scheduling a Flexible Flow Shops Problem using DEA

This paper considers a scheduling problem in flexible flow shops environment with the aim of minimizing two important criteria including makespan and cumulative tardiness of jobs. Since the proposed problem is known as an Np-hard problem in literature, we have to develop a meta-heuristic to solve it. We considered general structure of Genetic Algorithm (GA) and developed a new version of that based on Data Envelopment Analysis (DEA). Two objective functions assumed as two different inputs for each Decision Making Unit (DMU). In this paper we focused on efficiency score of DMUs and efficient frontier concept in DEA technique. After introducing the method we defined two different scenarios with considering two types of mutation operator. Also we provided an experimental design with some computational results to show the performance of algorithm. The results show that the algorithm implements in a reasonable time.

Stock Portfolio Selection Using Chemical Reaction Optimization

Stock portfolio selection is a classic problem in finance, and it involves deciding how to allocate an institution-s or an individual-s wealth to a number of stocks, with certain investment objectives (return and risk). In this paper, we adopt the classical Markowitz mean-variance model and consider an additional common realistic constraint, namely, the cardinality constraint. Thus, stock portfolio optimization becomes a mixed-integer quadratic programming problem and it is difficult to be solved by exact optimization algorithms. Chemical Reaction Optimization (CRO), which mimics the molecular interactions in a chemical reaction process, is a population-based metaheuristic method. Two different types of CRO, named canonical CRO and Super Molecule-based CRO (S-CRO), are proposed to solve the stock portfolio selection problem. We test both canonical CRO and S-CRO on a benchmark and compare their performance under two criteria: Markowitz efficient frontier (Pareto frontier) and Sharpe ratio. Computational experiments suggest that S-CRO is promising in handling the stock portfolio optimization problem.