A Study of Decentralized Portfolio Optimization with
Coordination by Swap Contracts
Yu Qian
Abstract
It is well known that decentralized portfolio optimization often leads to suboptimal asset allocation for
the firm. The efficiency loss caused by multiple portfolio managers trading on their own proprietary
models is a major issue especially if the clients or owners of the firm are interested in the firm’s overall
performance rather than the performance of individual portfolios. Despite its inefficiency,
decentralization is usually preferred in practice because it allows portfolio managers to specialize in
their own markets. This study shows that the appropriate use of a set of specifically designed swap
contracts can better align decentralized portfolio manager’s goals with that of the firm. Decentralized
portfolios coordinated by these swap contracts can achieve the same risk adjusted return as that of a
centrally managed portfolio. Experiments using both simulated and real market data are used to
demonstrate the efficiency gain of coordination by swap contracts.