Portfolio selection using neural networks

Abstract

In this paper we apply a heuristic method based on artificial neural networks (NN) in order to trace out the efficient frontier associated to the portfolio selection problem. We consider a generalization of the standard Markowitz mean-variance model which includes cardinality and bounding constraints. These constraints ensure the investment in a given number of different assets and limit the amount of capital to be invested in each asset. We present some experimental results obtained with the NN heuristic and we compare them to those obtained with three previous heuristic methods. The portfolio selection problem is an instance from the family of quadratic programming problems when the standard Markowitz mean-variance model is considered. But if this model is generalized to include cardinality and bounding constraints, then the portfolio selection problem becomes a mixed quadratic and integer programming problem. When considering the latter model, there is not any exact algorithm able to solve the portfolio selection problem in an efficient way. The use of heuristic algorithms in this case is imperative. In the past some heuristic methods based mainly on evolutionary algorithms, tabu search and simulated annealing have been developed. The purpose of this paper is to consider a particular neural network (NN) model, the Hopfield network, which has been used to solve some other optimisation problems and apply it here to the portfolio selection problem, comparing the new results to those obtained with previous heuristic algorithms.