Bond Index Tracking with Genetic Algorithms

Monday 29 March 2021

Research / Market

Bond portfolio optimization is very different from equity portfolio optimization. Indeed, while continuous optimization is efficient when managing a portfolio of stocks, it is not always well-adapted to building a bond portfolio because the transformation of portfolio weights into numbers of shares may lead to significant rounding errors. Indeed, bond investors are often restricted to purchasing bonds in multiples of a minimum transaction unit, which can be expressed as a minimum number of bonds or a minimum amount of dollars. This is why discrete optimization has generally replaced continuous optimization when the investment universe concerns fixed-income securities, especially when we consider the business of passive management, such as bond index funds, exchange-traded funds, and dedicated fixed-income funds...

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