Robust Regression with Optimisation Heuristics

Anthony Brabazon, Michael O’Neill and Dietmar Maringer, eds., NATURAL COMPUTING IN COMPUTATIONAL FINANCE, Volume 3, Springer 2010

26 Pages Posted: 13 Jul 2009 Last revised: 20 Oct 2010

See all articles by Manfred Gilli

Manfred Gilli

University of Geneva - Research Center for Statistics; Swiss Finance Institute

Enrico Schumann

Independent

Date Written: July 8, 2009

Abstract

Linear regression is widely-used in finance. While the standard method to obtain parameter estimates, Least Squares, has very appealing theoretical and numerical properties, obtained estimates are often unstable in the presence of extreme observations which are rather common in financial time series. One approach to deal with such extreme observations is the application of robust or resistant estimators, like Least Quantile of Squares estimators. Unfortunately, for many such alternative approaches, the estimation is much more difficult than in the Least Squares case, as the objective function is not convex and often has many local optima. We apply different heuristic methods like Differential Evolution, Particle Swarm and Threshold Accepting to obtain parameter estimates. Particular emphasis is put on the convergence properties of these techniques for fixed computational resources, and the techniques’ sensitivity for different parameter settings.

Keywords: Optimisation heuristics, Robust Regression, Least Median of Squares

JEL Classification: C61, C13

Suggested Citation

Gilli, Manfred and Schumann, Enrico, Robust Regression with Optimisation Heuristics (July 8, 2009). Anthony Brabazon, Michael O’Neill and Dietmar Maringer, eds., NATURAL COMPUTING IN COMPUTATIONAL FINANCE, Volume 3, Springer 2010. Available at SSRN: https://ssrn.com/abstract=1433291

Manfred Gilli

University of Geneva - Research Center for Statistics ( email )

Geneva
Switzerland
+41223798222 (Phone)
+41223798299 (Fax)

HOME PAGE: http://www.unige.ch/ses/metri/gilli/

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Enrico Schumann (Contact Author)

Independent ( email )

No Address Available

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