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Spin Glasses In The Trading Book

Author

Listed:
  • I. KONDOR

    (Department of Physics of Complex Systems, Eötvös University, 1518 Budapest, Pf. 32, Hungary;
    Raiffeisen Bank, 1052 Budapest, Váci u. 19-21, Hungary)

Abstract

The standard model defined in the Capital Adequacy Directive issued by the EEC in 1993 imposes nonlinear constraints on certain parts of the trading portfolios of financial institutions. It is shown that an institution that complies with the rules of the standard model but wants to optimize its portfolio according to some internal criteria, such as minimizing the variance or the VaR, faces a computational problem equivalent to finding the ground states of a long range spin glass. This problem is known to be NP-complete, and to have exponentially many solutions which are extremely sensitive to any changes of the input parameters.

Suggested Citation

  • I. Kondor, 2000. "Spin Glasses In The Trading Book," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 3(03), pages 537-540.
    • Handle: RePEc:wsi:ijtafx:v:03:y:2000:i:03:n:s0219024900000516
    DOI: 10.1142/S0219024900000516
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    Cited by:

    1. Imre Kondor & István Csabai & Gábor Papp & Enys Mones & Gábor Czimbalmos & Máté Sándor, 2014. "Strong random correlations in networks of heterogeneous agents," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 9(2), pages 203-232, October.

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