Article
The performance of bank portfolio optimization
Catarina Coelho,
José Luis Santos,
Pedro Júdice,
Catarina Coelho
Department of Mathematics, University of Coimbra, Coimbra, Portugal
Search for more papers by this authorJosé Luis Santos
CMUC, Department of Mathematics, University of Coimbra, Apartado 3008, Coimbra, Portugal
Search for more papers by this authorCorresponding Author
Pedro Júdice
ISCTE Business Research Unit, Avenida das Forças Armadas, Lisboa, Portugal
Corresponding author.
Search for more papers by this authorCatarina Coelho,
José Luis Santos,
Pedro Júdice,
Catarina Coelho
Department of Mathematics, University of Coimbra, Coimbra, Portugal
Search for more papers by this authorJosé Luis Santos
CMUC, Department of Mathematics, University of Coimbra, Apartado 3008, Coimbra, Portugal
Search for more papers by this authorCorresponding Author
Pedro Júdice
ISCTE Business Research Unit, Avenida das Forças Armadas, Lisboa, Portugal
Corresponding author.
Search for more papers by this authorAbstract
Given a liability structure, the bank portfolio optimization determines an asset allocation that maximizes profit, subject to restrictions on Basel III ratios and credit, liquidity, and market risks. Bank allocation models have not been tested using historical data. Using an optimization model based on turnover constraints, we develop such tests, which document the superior performance of optimization strategies compared to heuristic rules, resulting in an average annual out-of-sample outperformance of 15.1% in terms of return on equity using our data set. This outperformance is remarkable and contrasts with the reported underperformance of several portfolio optimization methods in the case of investment management.
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