Artificial intelligence combined with nonlinear optimization techniques and their application for yield curve optimization

Abstract

This study makes use of the artificial intelligence approaches combined with some nonlinear optimization techniques for optimization of a well-known problem in financial engineering called yield curve. Yield curve estimation plays an important role on making strategic investment decisions. In this paper, we use two well-known parsimonious estimation models, Nelson-Siegel and Extended Nelson-Siegel, for the yield curve estimation. The proposed models of this paper are formulated as continuous nonlinear optimization problems. The resulted models are then solved using some nonlinear optimization and meta-heuristic approaches. The optimization techniques include hybrid GPSO parallel trust region-dog leg, Hybrid GPSO parallel trust region-nearly exact, Hybrid GPSO parallel Levenberg-Marquardt and Hybrid genetic electromagnetism like algorithm. The proposed models of this paper are examined using some real-world data from the bank of England and the results are analyzed.