On the Optimization of Investment Strategies in the Context of Virtual Financial Market by the Individual Approach to Risk

Article type: Research Article

Authors: Mockus, Jonas^; | Katin, Igor | Katina, Joana

Affiliations: Institute of Mathematics and Informatics, Vilnius University, Akademijos 4, LT-08663 Vilnius, Lithuania, e-mail: [email protected], [email protected], [email protected]

Note: [] Corresponding author.

Abstract: The optimal financial investment (Portfolio) problem was investigated by leading financial organizations and scientists. Nobel prizes were awarded for the Modern Portfolio Theory (MPT) and further developments. The aim of these works was to define the optimal diversification of the assets depending on the acceptable risk level. In contrast, the objective of this work is to provide a flexible, easily adaptable model of virtual financial markets designed for the needs of individual users in the context of utility theory. The aim is to optimize investment strategies. This aim is the new element of the proposed model and simulation system since optimization is performed in the space of investment strategies; both short term and longer term. The new and unexpected result of experiments with the historical financial time series using the PORTFOLIO model is the observation that the minimal prediction errors do not provide the maximal profits.

Keywords: optimization, portfolio problem, utility theory, Nash equilibrium, stock exchange

Journal: Informatica, vol. 25, no. 2, pp. 241-264, 2014