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This work presents a novel application of the Stochastic Dual Dynamic Problem (SDDP) to large-scale asset allocation. We construct a model that delivers allocation policies based on how the portfolio performs with respect to user-defined (synthetic) indexes, and implement it in a SDDP open-source package. Based on US economic cycles and ETF data, we generate Markovian regime-dependent returns to solve an instance of multiple assets and 28 time periods. Results show our solution outperforms its benchmark, in both profitability and tracking error.
RESUMO
PURPOSE: This paper aims to support the equity reassignment process of large family business conglomerates, which can be complex due to both the nature and number of companies involved and specific owner requirements. Addressing these issues is especially important in the context of family businesses, since a successful reassignment might resolve and prevent family conflicts. DESIGN/METHODOLOGY/APPROACH: The paper presents a model that determines the optimal reassignment in terms of a specific owner's preferences. This model can also handle different types of requirements, including accounting for equity and intra-loan partition between owners and controlling for liquidity, capital structure, and transaction costs. The model also considers risk diversification for each member's fortune by considering the uncertainty involved in the future value of each firm, which can change at any point depending on industry and market conditions. The methodology not only finds the optimal solution in terms of a specific target, but it allows for post-optimal analysis so that owners can obtain important insights in terms of the costs involved in adding each requirement to the model. FINDINGS/RESULTS: The model was successfully applied in a real case study. The tool played a primary role in identifying a new equity distribution for a family holding structure composed of 4 members and 26 companies. In the first step, the model derived an optimal solution in terms of the target chosen by the owners, but it did not fully satisfy all members. However, owners were able to come to a decision regarding final reassignment after doing a sensible post-optimal analysis. ORIGINALITY/VALUE: Previous research has focused on analyzing the special characteristics of family-run businesses and how they differ with respect to non-family-run businesses in terms of performance, governance, and management, among other things. However, this paper is the first referring to the process of ownership reassignment and to use an optimization model in its methodology. It is also the first study that bridges the gaps between the disciplines of portfolio optimization, corporate finance, and family business.