An estimation of distribution algorithm with clustering for scenario-based robust financial optimization

Abstract

One important problem in financial optimization is to search for robust investment plans that can maximize return while minimizing risk. The market environment, namely the scenario of the problem in optimization, always affects the return and risk of an investment plan. Those financial optimization problems that the performance of the investment plans largely depends on the scenarios are defined as scenario-based optimization problems. This kind of uncertainty is called scenario-based uncertainty. The consideration of scenario-based uncertainty in multi-objective optimization problem is a largely under explored domain. In this paper, a nondominated sorting estimation of distribution algorithm with clustering (NSEDA-C) is proposed to deal with scenario-based robust financial problems. A robust group insurance portfolio problem is taken as an instance to study the features of scenario-based robust financial problems. A simplified simulation method is applied to measure the return while an estimation model is devised to measure the risk. Applications of the NSEDA-C on the group insurance portfolio problem for real-world insurance products have validated the effectiveness of the proposed algorithm.