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Bacterial Foraging Optimization Approach to Portfolio Optimization

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  • Yucheng Kao
  • Hsiu-Tzu Cheng

Abstract

In this paper we propose a heuristic approach based on bacterial foraging optimization (BFO) in order to find the efficient frontier associated with the portfolio optimization (PO) problem. The PO model with cardinality and bounding constraints is a mixed quadratic and integer programming problem for which no exact algorithms can solve in an efficient way. Consequently, various heuristic algorithms, such as genetic algorithms and particle swarm optimization, have been proposed in the past. This paper aims to examine the potential of a BFO algorithm in solving the PO problem. BFO is a new swarm intelligence technique that has been successfully applied to several real world problems. Through three operations, chemotaxis, reproduction, and elimination-dispersal, the proposed BFO algorithm can effectively solve a PO problem. The performance of the proposed approach was evaluated in computational tests on five benchmark data sets, and the results were compared to those obtained from existing heuristic algorithms. The proposed BFO algorithm is found to be superior to previous heuristic algorithms in terms of solution quality and time. Copyright Springer Science+Business Media New York 2013

Suggested Citation

  • Yucheng Kao & Hsiu-Tzu Cheng, 2013. "Bacterial Foraging Optimization Approach to Portfolio Optimization," Computational Economics, Springer;Society for Computational Economics, vol. 42(4), pages 453-470, December.
    • Handle: RePEc:kap:compec:v:42:y:2013:i:4:p:453-470
    DOI: 10.1007/s10614-012-9357-4
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    References listed on IDEAS

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    1. Schaerf, Andrea, 2002. "Local Search Techniques for Constrained Portfolio Selection Problems," Computational Economics, Springer;Society for Computational Economics, vol. 20(3), pages 177-190, December.
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    4. Woodside-Oriakhi, M. & Lucas, C. & Beasley, J.E., 2011. "Heuristic algorithms for the cardinality constrained efficient frontier," European Journal of Operational Research, Elsevier, vol. 213(3), pages 538-550, September.
    5. N. J. Jobst & M. D. Horniman & C. A. Lucas & G. Mitra, 2001. "Computational aspects of alternative portfolio selection models in the presence of discrete asset choice constraints," Quantitative Finance, Taylor & Francis Journals, vol. 1(5), pages 489-501.
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