Mathematical programming and its application in finance

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. Kolkata, India, Indian Statistical Institute pp. 1-14. (Statistical Science and Interdisciplinary Research, 1).


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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.

Item Type: Book Section
ISSNs: 1793-6195 (print)
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Keywords: mathematical programming, optimization problems in finance, portfolio optimization, credit scorecards, linear programming, asset-liability models

ePrint ID: 51330
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Date Deposited: 05 Aug 2008
Last Modified: 16 Apr 2017 18:05
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