[GSoC-PortA] Question on quadratic constraint specification

[Doug Martin]

From: gsoc-porta-bounces at lists.r-forge.r-project.org
[mailto:gsoc-porta-bounces at lists.r-forge.r-project.org] On Behalf Of Ross
Bennett
Sent: Monday, June 24, 2013 5:45 PM
To: PortfolioAnalytics
Subject: Re: [GSoC-PortA] Question on quadratic constraint specification

 

See comments below

On Mon, Jun 24, 2013 at 10:27 AM, Doug Martin <martinrd at comcast.net> wrote:

 

 

 

From: gsoc-porta-bounces at lists.r-forge.r-project.org
[mailto:gsoc-porta-bounces at lists.r-forge.r-project.org] On Behalf Of Ross
Bennett
Sent: Monday, June 24, 2013 7:02 AM
To: PortfolioAnalytics
Subject: [GSoC-PortA] Question on quadratic constraint specification

 

Hi All,

 

I have a quick question on quadratic constraint specification. One of the
bullet points under constraints is "provide quadratic constraint
specification". I did some digging for the ROI solvers and found that
quadprog and glpk only handle linear constraints. The ROI plugin for cplex
can handle a quadratic constraint, but this is a commercial product so I am
not sure if we want to go down that road and add support for the cplex
plugin for optimize_method="ROI". Are there workarounds to handle quadratic
constraints in quadprog or glpk?

[Doug] I have thought very about the desirability of a chapter on cplex in
view of the extensive use of the product.  But there is so much else to do
that this probably won't happen this go around

[Ross] It looks like the IBM CPLEX suite is free for academic use. I might
be able to work on this in the fall after GSOC is complete.

[Doug] Well, that would be serious incentive.

 

 

Is the intent of providing quadratic constraint specification to allow the
user to specify or define any function?

[Doug] A generic quadratic constraint capability would be ideal.  But just
adding the two you list below would be a good first step.  With regard to
the second below, I note that Jorion showed that adding an absolute
volatility risk constraint to TEV portfolios improves their performance.

[Ross] Sounds good, I'll work on adding constraint types for diversification
and volatility.

[Doug] I briefly describe the Jorion 2003 result in the appendix of LSS4
attached, and have attached the paper.

We did something similar with ETL based optimization in FinAnalytica's
Cognity product.

 

 

Or should we limit it to pre-defined constraint types and functions that I
can add?

 

A couple use cases for a quadratic constraint that I thought of are:

- Diversification (Allows the user to specify a diversification limit as a
constraint).

- Volatility (Allows the user to specify a target volatility (or min or max)
as a constraint. (e.g. see Peter Carl's email with a portfolio specific
limit to target volatility of > 10%)

- Other use cases for quadratic constraints?

 

I can add constraint functions for diversification, volatility, etc. and
then this could be implemented in constrained_objective or with the mapping
function that I will work on in the next section.

 

Thanks,

Ross Bennett


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