Stochastic Programming in Finance

TE29.1 Creating Customized Financial Securities via Multi-Stage Stochastic Programs John M. Mulvey --- Princeton Univ., Dept. of Civil Eng. & OR, E-407 E Quad., Princeton, NJ 08544 , (mulvey@macbeth.princeton.edu)

A multi-stage stochastic program is structured to identify scenarios¨ that cause difficulties for a long-term investor. We re-shape the¨ wealth path by purchasing/selling customized financial products with¨ payoffs conditional on several economic factors, such as interest¨ rate and inflation trends. An example is presented for a large¨ re-insurance company.

TE29.2 Comparisons of Static & Dynamic Asset Allocation Models John R. Birge --- Univ. of MI, Dept. of IOE, 1205 Beal Ave., Ann Arbor, MI 48109-2117, (jrbirge@umich.edu)

The classical Markowitz portfolio model assumes a static environment¨ in creating an efficient portfolio. We compare this approach with a¨ stochastic program that optimizes asset allocation over a fixed time¨ horizon with given liabilities and transaction fees. We use¨ historical data for a collection of asset indices.

TE29.3 Financial Planning Model via Multistage Stochastic Programming Yuan-An Fan, Steve Murray, Andy Turner --- Frank Russell Co., 909 A St., Tacoma, WA 98402 , (yfan@mail.russell.com)

We describe the implementation of a retail level Italian financial¨ planning model. We include a description of the real world setting¨ from a consumer view point, issues regarding its simplification into¨ a large scale stochastic programming model and subsequent¨ translation of the solution to the consumer's original context.