TY - JOUR

T1 - A model for designing callable bonds and its solution using tabu search

AU - Consiglio, Andrea

AU - Consiglio, Andrea

AU - Zenios, Stavros A.

PY - 1997

Y1 - 1997

N2 - We formulate the problem of designing callable bonds as a non-linear, global, optimization problem. The data of the model are obtained from simulations of holding-period returns of a given bond design, which are used to compute a certainty equivalent return, viz., some target assets. The design specifications of the callable bond are then adjusted so that the certainty equivalent return is maximized. The resulting problem is multi-modal, and a tabu search procedure, implemented on a distributed network of workstations, is used to optimize the bond design. The model is compared with the classical portfolio immunization model, and the tabu search solution technique is compared with simulated annealing for solving the global optimization program. It is shown that the global optimization model yields higher returns than portfolio immunization. It is also shown that tabu search is computationally more efficient than simulated annealing in solving the model, and it produces better solutions.

AB - We formulate the problem of designing callable bonds as a non-linear, global, optimization problem. The data of the model are obtained from simulations of holding-period returns of a given bond design, which are used to compute a certainty equivalent return, viz., some target assets. The design specifications of the callable bond are then adjusted so that the certainty equivalent return is maximized. The resulting problem is multi-modal, and a tabu search procedure, implemented on a distributed network of workstations, is used to optimize the bond design. The model is compared with the classical portfolio immunization model, and the tabu search solution technique is compared with simulated annealing for solving the global optimization program. It is shown that the global optimization model yields higher returns than portfolio immunization. It is also shown that tabu search is computationally more efficient than simulated annealing in solving the model, and it produces better solutions.

KW - Callable bonds

KW - Financial innovation

KW - Parallel computations

KW - Product design

KW - Simulation

KW - Tabu search

KW - Callable bonds

KW - Financial innovation

KW - Parallel computations

KW - Product design

KW - Simulation

KW - Tabu search

UR - http://hdl.handle.net/10447/432606

M3 - Article

VL - 21

SP - 1445

EP - 1470

JO - JOURNAL OF ECONOMIC DYNAMICS & CONTROL

JF - JOURNAL OF ECONOMIC DYNAMICS & CONTROL

SN - 0165-1889

ER -