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Mathematical programming and its application in finance

Mathematical programming and its application in finance
Mathematical programming and its application in finance
This article reviews some of the applications of mathematical programming in finance. Of course mathematical programming has long been recognised as a vital modelling approach to solve optimization problems in finance. Markowitz’s Nobel Prize winning work on portfolio optimization showed how important a technique it is. Other prominent and well documented applications in long-term financial planning and portfolio problems include asset-liability management for pension plans and insurance companies, integrated risk management for intermediaries, and long-term planning for individuals. Nowadays there is an emphasis on the interaction between optimization and simulation techniques in these problems There are though many uses of mathematical programming in finance which are not purely about optimizing the return on a portfolio and we will also discuss these applications. For example we discuss how one can use linear programming to estimate the term structure of interest rates for the prices of bonds. In the personal sector finance, where the lending is far greater than the higher profile corporate sector, the use of linear programming as a way of developing credit scorecards is proving extremely valuable.
mathematical programming, optimization problems in finance, portfolio optimization, credit scorecards, linear programming, asset-liability models
1793-6195
1-14
Indian Statistical Institute
Thomas, Lyn C.
a3ce3068-328b-4bce-889f-965b0b9d2362
Neogy, S.K.
Bapat, R.B.
Das, A.K.
Parthasarathy, T.
Thomas, Lyn C.
a3ce3068-328b-4bce-889f-965b0b9d2362
Neogy, S.K.
Bapat, R.B.
Das, A.K.
Parthasarathy, T.

Thomas, Lyn C. (2007) Mathematical programming and its application in finance. In, Neogy, S.K., Bapat, R.B., Das, A.K. and Parthasarathy, T. (eds.) Mathematical Programming and Game Theory for Decision Making. (Statistical Science and Interdisciplinary Research, 1) Kolkata, India. Indian Statistical Institute, pp. 1-14.

Record type: Book Section

Abstract

This article reviews some of the applications of mathematical programming in finance. Of course mathematical programming has long been recognised as a vital modelling approach to solve optimization problems in finance. Markowitz’s Nobel Prize winning work on portfolio optimization showed how important a technique it is. Other prominent and well documented applications in long-term financial planning and portfolio problems include asset-liability management for pension plans and insurance companies, integrated risk management for intermediaries, and long-term planning for individuals. Nowadays there is an emphasis on the interaction between optimization and simulation techniques in these problems There are though many uses of mathematical programming in finance which are not purely about optimizing the return on a portfolio and we will also discuss these applications. For example we discuss how one can use linear programming to estimate the term structure of interest rates for the prices of bonds. In the personal sector finance, where the lending is far greater than the higher profile corporate sector, the use of linear programming as a way of developing credit scorecards is proving extremely valuable.

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More information

Published date: 2007
Keywords: mathematical programming, optimization problems in finance, portfolio optimization, credit scorecards, linear programming, asset-liability models

Identifiers

Local EPrints ID: 51330
URI: http://eprints.soton.ac.uk/id/eprint/51330
ISSN: 1793-6195
PURE UUID: 1ae7aaca-465d-4c10-b355-acf85ad615cf

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Date deposited: 05 Aug 2008
Last modified: 11 Dec 2021 17:09

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Contributors

Author: Lyn C. Thomas
Editor: S.K. Neogy
Editor: R.B. Bapat
Editor: A.K. Das
Editor: T. Parthasarathy

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