[R-SIG-Finance] Portfolio Min Variance Optimisation with Turnover Constraints

[Graham Ewen]

Hi,

I am new to using R for optimisation and I am trying to set up a simple portfolio minimum variance optimisation with turnover constraints, but am having some difficulty setting up the problem correctly. I would really appreciate any help. I am trying two approaches one using the Rsolnp library and the other using the the parma library, but am having trouble with both.

Using Rsolnp I am having trouble getting the optimisation to converge, but this may be that the problem is poorly conditioned but please advise if the formulation seems correct.

ineq.fun.turnover <- function (x, sigma, wInit)
{
  return(sum(abs(x - wInit)))
}

obj.fun <- function(x, sigma, wInit)
{
  return(as.numeric(x%*%sigma%*%x))
}

eq.fun <- function(x,sigma,wInit)
{
  return(sum(x))
}

tst <- solnp(initWeights, fun=obj.fun, eqfun=eq.fun, eqB = 1.0, ineqfun = ineq.fun.turnover,
             ineqLB = 0.0, ineqUB = 0.2, LB = rep(0,numberOfSecurities), UB = rep(0.1,numberOfSecurities),
             sigma = covarMatx, wInit = initWeights)


Where initWeights is a vector of length numberOfSecurities, and the covarMatx is a covariance Matrix (generated from a factor model) of dimensions numberOfSecurities by numberOfSecurities.

Using parma, I cannot seem to get parmaspec to recognise the turnover constraint inequality functions (using the custom ones in the library), so I am guessing I am using incompatible parameters.... ?

servars = list()
uservars$turnover <- 0.2
uservars$wold <- initWeights

spec2 <- parmaspec(S = covarMatx,  LB = lowerBounds, UB = upperBounds,
                  risk = "EV", riskType = "minrisk",
                  ineqfun = list(ineqfun.turnover.min), ineqgrad = list(ineqjac.turnover.min), uservars = uservars)


It simply tries to solve the QP min risk problem ignoring the turnover inequality.


Thank you,

Graham.



Graham Ewen
BlueCrest Capital Management (UK) LLP
40 Grosvenor Place, London, SW1X 7AW, United Kingdom
T  +44 20 3180 3530
graham.ewen at bluecrestcapital.com<mailto:graham.ewen at bluecrestcapital.com>
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