Convex Optimization

A Tick-by-Tick Solution for Concentrated Liquidity Provisioning ArXiv ID: 2405.18728 “View on arXiv” Authors: Unknown Abstract Automated market makers with concentrated liquidity capabilities are programmable at the tick level. The maximization of earned fees, plus depreciated reserves, is a convex optimization problem whose vector solution gives the best provision of liquidity at each tick under a given set of parameter estimates for swap volume and price volatility. Surprisingly, early results show that concentrating liquidity around the current price is usually not the best strategy. ...

Exponentially Weighted Moving Models ArXiv ID: 2404.08136 “View on arXiv” Authors: Unknown Abstract An exponentially weighted moving model (EWMM) for a vector time series fits a new data model each time period, based on an exponentially fading loss function on past observed data. The well known and widely used exponentially weighted moving average (EWMA) is a special case that estimates the mean using a square loss function. For quadratic loss functions EWMMs can be fit using a simple recursion that updates the parameters of a quadratic function. For other loss functions, the entire past history must be stored, and the fitting problem grows in size as time increases. We propose a general method for computing an approximation of EWMM, which requires storing only a window of a fixed number of past samples, and uses an additional quadratic term to approximate the loss associated with the data before the window. This approximate EWMM relies on convex optimization, and solves problems that do not grow with time. We compare the estimates produced by our approximation with the estimates from the exact EWMM method. ...

The Boosted Difference of Convex Functions Algorithm for Value-at-Risk Constrained Portfolio Optimization ArXiv ID: 2402.09194 “View on arXiv” Authors: Unknown Abstract A highly relevant problem of modern finance is the design of Value-at-Risk (VaR) optimal portfolios. Due to contemporary financial regulations, banks and other financial institutions are tied to use the risk measure to control their credit, market, and operational risks. Despite its practical relevance, the non-convexity induced by VaR constraints in portfolio optimization problems remains a major challenge. To address this complexity more effectively, this paper proposes the use of the Boosted Difference-of-Convex Functions Algorithm (BDCA) to approximately solve a Markowitz-style portfolio selection problem with a VaR constraint. As one of the key contributions, we derive a novel line search framework that allows the application of the algorithm to Difference-of-Convex functions (DC) programs where both components are non-smooth. Moreover, we prove that the BDCA linearly converges to a Karush-Kuhn-Tucker point for the problem at hand using the Kurdyka-Lojasiewicz property. We also outline that this result can be generalized to a broader class of piecewise-linear DC programs with linear equality and inequality constraints. In the practical part, extensive numerical experiments under consideration of best practices then demonstrate the robustness of the BDCA under challenging constraint settings and adverse initialization. In particular, the algorithm consistently identifies the highest number of feasible solutions even under the most challenging conditions, while other approaches from chance-constrained programming lead to a complete failure in these settings. Due to the open availability of all data sets and code, this paper further provides a practical guide for transparent and easily reproducible comparisons of VaR-constrained portfolio selection problems in Python. ...

Closed-form solutions for generic N-token AMM arbitrage ArXiv ID: 2402.06731 “View on arXiv” Authors: Unknown Abstract Convex optimisation has provided a mechanism to determine arbitrage trades on automated market markets (AMMs) since almost their inception. Here we outline generic closed-form solutions for $N$-token geometric mean market maker pool arbitrage, that in simulation (with synthetic and historic data) provide better arbitrage opportunities than convex optimisers and is able to capitalise on those opportunities sooner. Furthermore, the intrinsic parallelism of the proposed approach (unlike convex optimisation) offers the ability to scale on GPUs, opening up a new approach to AMM modelling by offering an alternative to numerical-solver-based methods. The lower computational cost of running this new mechanism can also enable on-chain arbitrage bots for multi-asset pools. ...

Markowitz Portfolio Construction at Seventy ArXiv ID: 2401.05080 “View on arXiv” Authors: Unknown Abstract More than seventy years ago Harry Markowitz formulated portfolio construction as an optimization problem that trades off expected return and risk, defined as the standard deviation of the portfolio returns. Since then the method has been extended to include many practical constraints and objective terms, such as transaction cost or leverage limits. Despite several criticisms of Markowitz’s method, for example its sensitivity to poor forecasts of the return statistics, it has become the dominant quantitative method for portfolio construction in practice. In this article we describe an extension of Markowitz’s method that addresses many practical effects and gracefully handles the uncertainty inherent in return statistics forecasting. Like Markowitz’s original formulation, the extension is also a convex optimization problem, which can be solved with high reliability and speed. ...

Signature Methods in Stochastic Portfolio Theory ArXiv ID: 2310.02322 “View on arXiv” Authors: Unknown Abstract In the context of stochastic portfolio theory we introduce a novel class of portfolios which we call linear path-functional portfolios. These are portfolios which are determined by certain transformations of linear functions of a collections of feature maps that are non-anticipative path functionals of an underlying semimartingale. As main example for such feature maps we consider the signature of the (ranked) market weights. We prove that these portfolios are universal in the sense that every continuous, possibly path-dependent, portfolio function of the market weights can be uniformly approximated by signature portfolios. We also show that signature portfolios can approximate the growth-optimal portfolio in several classes of non-Markovian market models arbitrarily well and illustrate numerically that the trained signature portfolios are remarkably close to the theoretical growth-optimal portfolios. Besides these universality features, the main numerical advantage lies in the fact that several optimization tasks like maximizing (expected) logarithmic wealth or mean-variance optimization within the class of linear path-functional portfolios reduce to a convex quadratic optimization problem, thus making it computationally highly tractable. We apply our method also to real market data based on several indices. Our results point towards out-performance on the considered out-of-sample data, also in the presence of transaction costs. ...

Risk Budgeting Allocation for Dynamic Risk Measures ArXiv ID: 2305.11319 “View on arXiv” Authors: Unknown Abstract We define and develop an approach for risk budgeting allocation - a risk diversification portfolio strategy - where risk is measured using a dynamic time-consistent risk measure. For this, we introduce a notion of dynamic risk contributions that generalise the classical Euler contributions and which allow us to obtain dynamic risk contributions in a recursive manner. We prove that, for the class of coherent dynamic distortion risk measures, the risk allocation problem may be recast as a sequence of strictly convex optimisation problems. Moreover, we show that self-financing dynamic risk budgeting strategies with initial wealth of 1 are scaled versions of the solution of the sequence of convex optimisation problems. Furthermore, we develop an actor-critic approach, leveraging the elicitability of dynamic risk measures, to solve for risk budgeting strategies using deep learning. ...

Convex optimization over a probability simplex ArXiv ID: 2305.09046 “View on arXiv” Authors: Unknown Abstract We propose a new iteration scheme, the Cauchy-Simplex, to optimize convex problems over the probability simplex ${“w\in\mathbb{R”}^n\ |\ \sum_i w_i=1\ \textrm{“and”}\ w_i\geq0}$. Specifically, we map the simplex to the positive quadrant of a unit sphere, envisage gradient descent in latent variables, and map the result back in a way that only depends on the simplex variable. Moreover, proving rigorous convergence results in this formulation leads inherently to tools from information theory (e.g., cross-entropy and KL divergence). Each iteration of the Cauchy-Simplex consists of simple operations, making it well-suited for high-dimensional problems. In continuous time, we prove that $f(x_T)-f(x^) = {“O”}(1/T)$ for differentiable real-valued convex functions, where $T$ is the number of time steps and $w^$ is the optimal solution. Numerical experiments of projection onto convex hulls show faster convergence than similar algorithms. Finally, we apply our algorithm to online learning problems and prove the convergence of the average regret for (1) Prediction with expert advice and (2) Universal Portfolios. ...