The application of optimization techniques on corporative
environment for analysis and extraction of financial information is intense and
works on the edge of the hardware and software technology.
Optimization is the process of changing the system parameters in order to
maximize or minimize a given utility function. Generally we see situations
we want to maximize profitability and minimize risk or volatility.
The most popular optimization by the market today is the
risk versus return model (Markowitz) of a portfolio of assets (stocks, for
example). The goal of this optimization is to allocate capital in a basket
of assets in a proportion that seeks to maximize return and minimize risk ordispersion. The model is particularly interesting when the objective is to
reduce risk, but must be used with caution if the objective is to use as a
strategy for asset management, because the estimated profitability presents a
very high degree of inaccuracy (the model uses the arithmetic mean of historical returns to
estimate future returns). It can be used, for example, a second process,
where the pre-selected asset were chosen as another key strategy.
There are other applications
of tools in corporate finance, we can mention the optimization of the value of
cash balance. The working capital of a company has the primary function of
generating liquidity for routine operations and in any institution. A low
working capital may incur a significant cost in loans and management fees, as
well as excess working capital incur in a opportunity cost, incurring on losing
their real value over time. This value will determine precisely the
optimal balance between these two demands.
The development of trading
systems makes extensive use of optimization methods, and sometimes a level of
complexity that would make the algorithmic description impracticable in
this post. One of them is the optimization of the parameters of a system
when using a window of historical data and performed various backtestings. Can be used in the management of multiple systems. The
topic of optimization of trading systems will be addressed again and need a more
detail teaching methodology.
The optimization process,
however should not be used indiscriminately. The result of an optimization
is only one step in a process that often needs to be restarted. It is
possible to enumerate many factors for a good optimization, and even more for
the validation of the optimization solution generated. You can, for
example, achieve a certain solution and actually be very good theoretically,
but it can have a high sensitivity to other factors not taken into
consideration as a possible variation in the spread, changes in the brokerage
fee used in the simulation, etc.
