Jay's Asset Allocation Blog

Blog about my off-hours work on the problem of Asset Allocation including but not limited to Portfolio Optimization algorithms, algorithms and approaches for improved estimation of Asset Allocation inputs and other potentially related items.

Wednesday, October 10, 2007

Simulated Annealing

So I couldn't just work on the diversification paper, I had to get into Simulated Annealing at the same time. The good news is that it is related, and the primary motivation for a simulated annealing algorithm is for a cardinality constrained portfolio to add to the models used in my paper on diversification and portfolio optimization. The papers, Heuristics for Cardinality Constrained Portfolio Optimisation by Chang, et al, and A Multiobjective Approach to the Portfolio Optimization Problem by Armananzas and Lozano both give pseudo code for applying simulated annealing to the problem of Portfolio Optimization.

Then it'll be back to Black-Litterman for an update of that document and a refresh of the website. I am hoping to work an example of two factor Black-Litterman as Krishnan & Mains did, but I am going to use volatility as the missing factor proxied by the VIX. I can easily get the VIX data, so I'm thinking it'll be open source finance to put it together for the next person to look at, plus it'll knock off one of the outstanding items I have on the Black-Litterman front.