Gray Wolf Optimization Algorithm for Multi-Constraints Second-Order Stochastic Dominance Portfolio Optimization

• Main Authors: Yixuan Ren, Tao Ye, Mengxing Huang, Siling Feng
• Format: Article
• Language: English
• Published: MDPI AG 2018-05-01
• Series: Algorithms
• Subjects: portfolio optimization; gray wolf optimization; second-order stochastic dominance; risk; constraint
• Online Access: http://www.mdpi.com/1999-4893/11/5/72

In the field of investment, how to construct a suitable portfolio based on historical data is still an important issue. The second-order stochastic dominant constraint is a branch of the stochastic dominant constraint theory. However, only considering the second-order stochastic dominant constraints does not conform to the investment environment under realistic conditions. Therefore, we added a series of constraints into basic portfolio optimization model, which reflect the realistic investment environment, such as skewness and kurtosis. In addition, we consider two kinds of risk measures: conditional value at risk and value at risk. Most important of all, in this paper, we introduce Gray Wolf Optimization (GWO) algorithm into portfolio optimization model, which simulates the gray wolf’s social hierarchy and predatory behavior. In the numerical experiments, we compare the GWO algorithm with Particle Swarm Optimization (PSO) algorithm and Genetic Algorithm (GA). The experimental results show that GWO algorithm not only shows better optimization ability and optimization efficiency, but also the portfolio optimized by GWO algorithm has a better performance than FTSE100 index, which prove that GWO algorithm has a great potential in portfolio optimization.