A Two-Period Portfolio Selection Model for Asset-backed Securitization

Authors

  • Renata Mansini University of Brescia
  • Ulrich Pferschy University of Graz

Keywords:

Asset-Backed Securitization, Lagrangian heuristics, worst-case analysis

Abstract

Asset-Backed Securitization (ABS) is a well-stated financial mechanism which allows an institution (either a commercial bank or a firm) to get funds through the conversion of assets into capital market products called notes or asset-backed securities. In this paper, we analyze the combinatorial problem faced by the financial institution which has to optimally select the set of assets to be converted into notes. We assume that assets follow an amortization rule characterized by constant periodic principal installments (Italian amortization). The particular shape of the assets outstanding principal is exploited both in the mathematical formulation of the problem and in its solution. In particular, we study a model formulation for the special case where assets selection occurs at two dates during the securitization process. We introduce two heuristic approaches based on Lagrangian relaxation and analyze their worst-case behavior compared to the optimal solution value. The performance of the algorithms is tested on a large set of problem instances generated according to two real-world scenarios provided by a leasing company. The proposed approximation algorithms turn out to yield solutions of high quality within very short computation time. The comparison to the solution approach applied by practitioners yields an average improvement of roughly 10% of the objective function value.

Author Biography

Renata Mansini, University of Brescia

Department of Electronics for Automation via Branze 38 25123 Brescia Italy

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Published

2009-09-16

How to Cite

Mansini, R., & Pferschy, U. (2009). A Two-Period Portfolio Selection Model for Asset-backed Securitization. Algorithmic Operations Research, 4(2), Pages 155 – 170. Retrieved from https://journals.lib.unb.ca/index.php/AOR/article/view/10091

Issue

Vol. 4 No. 2 (2009)

Section

Articles

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