Optimization by Means of Evolutionary Algorithms

Abstract

In the preceding Chapter 3, we presented a possible explanation for the inability of the standard market approach to fit quoted CDO tranche prices and to model the correlation smile. We suggested overcoming the deficiency of the standard market model by means of non-flat dependence structures. In the subsequent Chapter 5, we will explain how a correlation matrix can be derived from observed tranche spreads such that all tranche spreads of the CDO structure are reproduced simultaneously. This idea can be represented in the form of an optimization problem. This Chapter 4 addresses optimization algorithms.