Using Differential Evolution for Optimization in Finance

Speaker: David Basterfield, Ph.D., Senior Financial Engineer, Insightful Corporation

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Differential evolution is a form of genetic or evolutionary algorithm, which is a class of algorithms that uses mechanisms inspired by biological evolution, such as reproduction, mutation and natural selection, to solve difficult optimization problems. Differential evolution was created in 1995 by Kenneth Price and Rainer Storn, and has since earned the reputation of being a very effective global optimizer. The algorithm has a record of reliable and robust performance, particularly in the fields of science and engineering. In this talk, we will look at an implementation of this algorithm in S-PLUS®, and investigate how it may be applied to problems in finance, such as portfolio optimization and model calibration.

Dr David Basterfield joined Insightful Corporation in Seattle as a Senior Financial Engineer, where he is involved with the on-going development of the S+FinMetrics® package in S-PLUS, and for developing financial solutions based on these tools. Dr Basterfield has a Ph.D. in Decision Theory, an MS in Computational Finance, and an MBA. He was the Director of the Computational Finance program at Oregon Health & Sciences University, where he taught from 1999 – 2003, and Associate Professor of Finance at Hillsdale College, from 2004 to 2007. His research interests include derivatives pricing, risk management and optimization methods. Before coming to the USA in 1998, Dr Basterfield worked as a systems architect for CRI, a consultancy company in Luxembourg, whose main client is the European Commission. In his 12 year association with the Commission, Dr Basterfield was involved in many major projects. In particular, he helped design and develop the foreign trade database, their largest information system.

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