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Financial Innovation and the Computer-Aided Design of Financial Products
by
Andrea Consiglio
Dipartimento di Organizzazione Aziendale ed Amministrazione Pubblica
Coauthors: S.A. Zenios (University of Cyprus, Nicosia, Cyprus - Senior Fellow, The Wharton School, University of Pennsylvania, PA.)
Motivated by the surge in financial innovation of the last decade we look into the problem of designing financial products. We propose a general framework for the design of financial products, raising both institutional and technical issues that need to be addressed in the context of product design by financial intermediaries. We then develop integrated simulation and optimization models for designing such products, and apply the models to the design of callable bonds for a mortgage agency. The resulting optimization models are multimodal, and are solved using a heuristic algorithm based on tabu search. High-performance computers are used to carry out the compute-intensive simulations.
Empirical results illustrate the efficacy of the proposed models in dealing with the problem of security design, and their superior performance over traditional approaches such as duration-matching. The computational efficiency of the tabu search algorithm and the high-performance computing simulations will also be illustrated.
Date received: February 22, 1999
Copyright © 1999 by the author(s). The author(s) of this document and the organizers of the conference have granted their consent to include this abstract in Atlas Conferences Inc. Document # cacq-13.