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Global optimization for bilevel portfolio design: Economic insights from the Dow Jones index

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  • González-Díaz, Julio
  • González-Rodríguez, Brais
  • Leal, Marina
  • Puerto, Justo

Abstract

This paper deals with a portfolio selection problem with transaction costs and two levels of decision-making. It is assumed that the decision making structure is twofold: there is a broker-dealer that controls the fees to be charged on the different securities in order to maximize his benefit and there is an investor who chooses his portfolio trying to minimize risk while ensuring a minimum level of return. This structure gives rise to an implicit hierarchical competition that consists in anticipating the rational decision of the other agent in order to optimize the decision-makers’ own criteria. We analyze different situations depending on who is first in the hierarchy: the broker-dealer or the investor. We present different nonlinear and nonconvex mathematical programming models for the different situations and develop an extensive computational study in which we discuss the ensuing economic insights for the models based on Dow Jones index data.

Suggested Citation

  • González-Díaz, Julio & González-Rodríguez, Brais & Leal, Marina & Puerto, Justo, 2021. "Global optimization for bilevel portfolio design: Economic insights from the Dow Jones index," Omega, Elsevier, vol. 102(C).
    • Handle: RePEc:eee:jomega:v:102:y:2021:i:c:s0305048320307076
    DOI: 10.1016/j.omega.2020.102353
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    References listed on IDEAS

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    3. Haywood, Adam B. & Lunday, Brian J. & Robbins, Matthew J., 2022. "Intruder detection and interdiction modeling: A bilevel programming approach for ballistic missile defense asset location," Omega, Elsevier, vol. 110(C).

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