Financial Modeling Under Multiple Criteria

  • Michael DoumposEmail author
  • Constantin Zopounidis
Part of the Springer Optimization and Its Applications book series (SOIA, volume 100)


Financial modeling has become increasingly important for financial decision making and risk management. Over the years, the sophistication and complexity of financial models has increased, but the recent crisis raised criticism on their effectiveness. From the point of view of financial theory, financial modeling is mainly based on a normative and descriptive approach, which has adopted the wealth maximization principle. The multicriteria decision aid (MCDA) paradigm extends and enhances this framework, emphasizing the multidimensional aspects of financial decisions, which can be represented by quantitative and qualitative factors. MCDA introduces tools and methods that enable the structuring of financial problems, the analysis of trade-offs among multiple objectives, and the evaluation of multiple ways of actions, in a systematic and rigorous manner. This paper discusses the important role that MCDA can play in improving financial models for decision making using examples from the areas of investment appraisal, portfolio selection, and banking management. An up-to-date review of the relevant literature in these two areas is also presented.


Portfolio Selection Banking Management Venture Capital Firm Goal Programming Model Performance Measurement Approach 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


  1. 1.
    Arrow, K.J., Raynaud, H.: Social Choice and Multicriterion Decision-Making. MIT Press, Cambridge (1986)zbMATHGoogle Scholar
  2. 2.
    Babalos, V., Philippas, N., Doumpos, M., Zopounidis, C.: Mutual funds performance appraisal using stochastic multicriteria acceptability analysis. Appl. Math. Comput. 218(9), 5693–5703 (2012)MathSciNetCrossRefzbMATHGoogle Scholar
  3. 3.
    Bayrakdaroğlu, A., Yalçin, N.: A fuzzy multi criteria evaluation of the operational risk factors for the state-owned and privately-owned commercial banks in Turkey. Hum. Ecol. Risk Assess. 19, 443–461 (2013)CrossRefGoogle Scholar
  4. 4.
    Belton, V., Stewart, T.J.: Multiple Criteria Decision Analysis: An Integrated Approach. Kluwer, Dordrecht (2002)CrossRefGoogle Scholar
  5. 5.
    Bhaskar, K., McNamee, P.: Multiple objectives in accounting and finance. J. Bus. Finance Account. 10(4), 595–621 (1983)CrossRefGoogle Scholar
  6. 6.
    Bouyssou, D., Marchant, T., Pirlot, M., Tsoukiàs, A., Vincke, P.H.: Evaluation and Decision Models with Multiple Criteria: Stepping Stones for the Analyst. Springer, New York (2006)Google Scholar
  7. 7.
    Brans, J.P., Vincke, P.H.: A preference ranking organization method. Manage. Sci. 31(6), 647–656 (1985)MathSciNetCrossRefzbMATHGoogle Scholar
  8. 8.
    Briza, A.C., Naval, P.C.: Stock trading system based on the multi-objective particle swarm optimization of technical indicators on end-of-day market data. Appl. Soft Comput. 11(1), 1191–1201 (2011)CrossRefGoogle Scholar
  9. 9.
    Bugera, V., Konno, H., Uryasev, S.: Credit cards scoring with quadratic utility function. J. Multi-Criteria Decis. Anal. 11(4–5), 197–211 (2002)CrossRefzbMATHGoogle Scholar
  10. 10.
    Dash, G.H., Kajiji, N.: Evolving economy bank asset-liability and risk management under uncertainty with hierarchical objectives and nonlinear pricing. J. Multi-Criteria Decis. Anal. 11(4–5), 247–260 (2002)CrossRefzbMATHGoogle Scholar
  11. 11.
    Davies, R.J., Kat, H.M., Lu, S.: Fund of hedge funds portfolio selection: a multiple-objective approach. J. Derivatives Hedge Funds 15, 91–115 (2009)CrossRefGoogle Scholar
  12. 12.
    Dixon, R.: Venture capitalists and the appraisal of investments. Omega 19(5), 333–344 (1991)CrossRefGoogle Scholar
  13. 13.
    Doumpos, M., Zopounidis, C.: A multicriteria decision support system for bank rating. Decis. Support Syst. 50(1), 55–63 (2010)CrossRefGoogle Scholar
  14. 14.
    Doumpos, M., Zopounidis, C.: A multicriteria outranking modeling approach for credit rating. Decis. Sci. 42(3), 721–742 (2011)MathSciNetCrossRefGoogle Scholar
  15. 15.
    Doumpos, M., Marinakis, Y., Marinaki, M., Zopounidis, C.: An evolutionary approach to construction of outranking models for multicriteria classification: the case of the ELECTRE TRI method. Eur. J. Oper. Res. 199(2), 496–505 (2009)CrossRefzbMATHGoogle Scholar
  16. 16.
    Dyer, J.S.: MAUT—multiattribute utility theory. In: Figueira, J.R., Greco, S., Ehrgott, M., (eds.) Multiple Criteria Decision Analysis: State of the Art Surveys, pp. 265–285. Springer, Boston (2005)Google Scholar
  17. 17.
    Ehrgott, M., Figueira, J.R., Greco, S.: Trends in Multiple Criteria Decision Analysis. Springer, New York (2010)CrossRefzbMATHGoogle Scholar
  18. 18.
    Fabozzi, F.J., Focardi, S., Jonas, C.: Trends in quantitative equity management: survey results. Quant. Finance 7(2), 115–122 (2007)CrossRefGoogle Scholar
  19. 19.
    Figueira, J.R., Greco, S., Roy, B., Slowinski, R.: ELECTRE methods: main features and recent developments. In: Zopounidis, C., Pardalos, P.M., (eds.) Handbook of Multicriteria Analysis, pp. 51–89. Springer, Berlin/Heidelberg (2010)CrossRefGoogle Scholar
  20. 20.
    Gaganis, C., Pasiouras, F., Doumpos, M., Zopounidis, C.: Modelling banking sector stability with multicriteria approaches. Optim. Lett. 4, 543–558 (2010)MathSciNetCrossRefGoogle Scholar
  21. 21.
    García, F., Giménez, V., Guijarro, F.: Credit risk management: a multicriteria approach to assess creditworthiness. Math. Comput. Model. 57, 2009–2015 (2013)CrossRefGoogle Scholar
  22. 22.
    Ghandar, A, Michalewicz, Z., Zurbruegg, R.: Enhancing Profitability Through Interpretability in Algorithmic Trading with a Multiobjective Evolutionary Fuzzy System. Springer, Berlin (2012)Google Scholar
  23. 23.
    Gladish, B.P., Jones, D., Tqamiz, A., Terol, B.: An interactive three-stage model for mutual funds portfolio selection. Omega 35(1), 75–88 (2007)CrossRefGoogle Scholar
  24. 24.
    Götze, U., Northcott, D., Schuster, P.: Investment Appraisal—Methods and Models. Springer, Berlin/Heidelberg (2008)Google Scholar
  25. 25.
    Grabisch, M., Kojadinovic, I., Meyer, P.: A review of methods for capacity identification in Choquet integral based multi-attribute utility theory: applications of the Kappalab R package. Eur. J. Oper. Res. 186(2), 766–785 (2008)MathSciNetCrossRefzbMATHGoogle Scholar
  26. 26.
    Greco, S., Matarazzo, B., Slowinski, R.: Rough sets theory for multicriteria decision analysis. Eur. J. Oper. Res. 129(1), 1–47 (2001)MathSciNetCrossRefzbMATHGoogle Scholar
  27. 27.
    Grigoroudis, E., Tsitsiridi, E., Zopounidis, C.: Linking customer satisfaction, employee appraisal, and business performance: an evaluation methodology in the banking sector. Ann. Oper. Res. 205, 5–27 (2013)CrossRefzbMATHGoogle Scholar
  28. 28.
    Guo, Z., Zhou, Z.: A Multi-Objective Decision-Making Method for Commercial Banks Loan Portfolio. Springer, Berlin (2005)Google Scholar
  29. 29.
    Hall, J., Hofer, C.W.: Venture capitalists decision criteria in new venture evaluation. J. Bus. Venturing 8(1), 25–42 (1993)CrossRefGoogle Scholar
  30. 30.
    Hallerbach, W.G., Spronk, J.: The relevance of MCDM for financial decisions. J. Multi-Criteria Decis. Anal. 11(4–5), 187–195 (2002)CrossRefzbMATHGoogle Scholar
  31. 31.
    Hu, Y.-C., Liao, P.-C.: Finding critical criteria of evaluating electronic service quality of internet banking using fuzzy multiple-criteria decision making. Appl. Soft Comput. 11(4), 3764–3770 (2011)MathSciNetCrossRefGoogle Scholar
  32. 32.
    Hurson, C., Zopounidis, C.: Gestion de Portefeuille et Analyse Multicritère. Economica, Paris (1997)Google Scholar
  33. 33.
    Ioannidis, C., Pasiouras, F., Zopounidis, C.: Assessing bank soundness with classification techniques. Omega 38(5), 345–357 (2010)CrossRefGoogle Scholar
  34. 34.
    Jablonsky, J.: Multicriteria approaches for ranking of efficient units in DEA models. Cent. Eur. J. Oper. Res. 20, 435–449 (2012)MathSciNetCrossRefGoogle Scholar
  35. 35.
    Jacquet-Lagrèze, E., Siskos, Y.: Assessing a set of additive utility functions for multicriteria decision making: the UTA method. Eur. J. Oper. Res. 10(2), 151–164 (1982)CrossRefzbMATHGoogle Scholar
  36. 36.
    Jacquet-Lagrèze, E., Siskos, Y.: Preference disaggregation: twenty years of MCDA experience. Eur. J. Oper. Res. 130(2), 233–245 (2001)CrossRefzbMATHGoogle Scholar
  37. 37.
    Jondeau, W., Rockinger, M.: Optimal portfolio allocation under higher moments. Eur. Financ. Manage. 12(1), 29–55 (2006)CrossRefGoogle Scholar
  38. 38.
    Jones, D., Tamiz, M.: Practical Goal Programming. Springer, London (2012)Google Scholar
  39. 39.
    Keeney, R.L.: Common mistakes in making value trade-offs. Oper. Res. 50(6), 935–945 (2002)CrossRefzbMATHGoogle Scholar
  40. 40.
    Keeney, R.L., Raiffa, H.: Decisions with Multiple Objectives: Preferences and Value Trade-Offs. Cambridge University Press, Cambridge (1993)CrossRefGoogle Scholar
  41. 41.
    Kerstens, K., Mounir, A., van de Woestyne, I.: Geometric representation of the mean-variance-skewness portfolio frontier based upon the shortage function. Eur. J. Oper. Res. 210(1), 81–94 (2011)CrossRefzbMATHGoogle Scholar
  42. 42.
    Kosmidou, K., Zopounidis, C.: Goal Programming Techniques for Bank Asset Liability Management. Springer, Boston (2004)zbMATHGoogle Scholar
  43. 43.
    Li, Q., Sun, L., Bao, L.: Enhanced index tracking based on multi-objective immune algorithm. Expert Syst. Appl. 38(5), 6101–6106 (2011)CrossRefGoogle Scholar
  44. 44.
    Lohpetch, D., Corne, D.: Multiobjective Algorithms for Financial Trading: Multiobjective Out-trades Single-Objective, pp. 192–199. Institute of Electrical and Electronics Engineers, Melbourne (2011)Google Scholar
  45. 45.
    Macmillan, I.C., Siegel, R., Narasimha, P.N.S.: Criteria used by venture capitalists to evaluate new venture proposals. J. Bus. Venturing 1(1), 119–128 (1985)CrossRefGoogle Scholar
  46. 46.
    Mansini, R., Ogryczak, W., Speranza, M.G.: Conditional value at risk and related linear programming models for portfolio optimization. Ann. Oper. Res. 152, 227–256 (2007)MathSciNetCrossRefzbMATHGoogle Scholar
  47. 47.
    Markowitz, H.M.: Portfolio Selection: Efficient Diversification of Investment. Wiley, New York (1959)Google Scholar
  48. 48.
    Martel, J.M., Matarazzo, B.: Other outranking approaches. In: Figueira, J., Greco, S., Ehrogott, M. (eds.) Multiple Criteria Decision Analysis: State of the Art Surveys, pp. 197–259. Springer, New York (2005)Google Scholar
  49. 49.
    Miettinen, K.: Nonlinear Multiobjective Optimization. Kluwer Academic, Dordrecht (1999)zbMATHGoogle Scholar
  50. 50.
    Montibeller, G., Alberto Franco, L., Lord, E., Iglesias, A.: Structuring resource allocation decisions: a framework for building multi-criteria portfolio models with area-grouped options. Eur. J. Oper. Res. 199(3), 846–856 (2009)CrossRefzbMATHGoogle Scholar
  51. 51.
    Mousseau, V., Slowinski, R.: Inferring an ELECTRE TRI model from assignment examples. J. Glob. Optim. 12(2), 157–174 (1998)MathSciNetCrossRefzbMATHGoogle Scholar
  52. 52.
    Muzyka, D., Birley, S., Leleux, B.: Trade-offs in the investment decisions of European venture capitalists. J. Bus. Venturing 11(4), 273–287 (1996)CrossRefGoogle Scholar
  53. 53.
    Ogryczak, W.: Multiple criteria linear programming model for portfolio selection. Ann. Oper. Res. 97, 143–162 (2000)MathSciNetCrossRefzbMATHGoogle Scholar
  54. 54.
    Pahikkala, T., Waegeman, W., Tsivtsivadze, E., Salakoski, T., De Baets, B.: Learning intransitive reciprocal relations with kernel methods. Eur. J. Oper. Res. 206(3), 676–685 (2010)CrossRefzbMATHGoogle Scholar
  55. 55.
    Papageorgiou, D., Doumpos, M., Zopounidis, C., Pardalos, P.M.: Credit rating systems: regulatory framework and comparative evaluation of existing methods. In: Zopounidis, C., Doumpos, M., Pardalos, P.M. (eds.) Handbook of Financial Engineering, pp. 457–488. Springer, New York (2008)CrossRefGoogle Scholar
  56. 56.
    Rigopoulos, G., Anagnostopoulos, K.: Ffuzzy multicriteria assignment for nominal classification: methodology and application in evaluation of Greek bank’s electronic payment retailers. Int. J. Inf. Technol. Decis. Making 09(03), 437–454 (2010)CrossRefGoogle Scholar
  57. 57.
    Roman, D., Darby-Dowman, K., Mitra, G.: Mean-risk models using two risk measures: a multiobjective approach. Quant. Finance 7(4), 443–458 (2012)MathSciNetCrossRefGoogle Scholar
  58. 58.
    Roy, B.: Classement et choix en présence de points de vue multiples: la méthode ELECTRE. Revue Francaise d’Informatique et de Recherche Opérationnelle 8, 57–75 (1968)Google Scholar
  59. 59.
    Sahajwala, R., Van den Bergh, P.: Supervisory risk assessment and early warning systems. Technical Report 4, Bank of International Settlements, Basel (2000)Google Scholar
  60. 60.
    Sevastjanov, P., Dymova, L.: Stock screening with use of multiple criteria decision making and optimization. Omega 37(3), 659–671 (2009)MathSciNetCrossRefGoogle Scholar
  61. 61.
    Siskos, Y., Grigoroudis, E.: New trends in aggregation-disaggregation approaches. In: Zopounidis, C., Pardalos, P.M. (eds.) Handbook of Multicriteria Analysis, pp. 189–214. Springer, Berlin/Heidelberg (2010)CrossRefGoogle Scholar
  62. 62.
    Spronk, J., Hallerbach, W.: Financial modelling: where to go? With an illustration for portfolio management. Eur. J. Oper. Res. 99(1), 113–125 (1997)zbMATHGoogle Scholar
  63. 63.
    Spronk, J., Steuer, R.E., Zopounidis, C.: Multicriteria decision aid/analysis in finance. In: Figueira, J., Greco, S., Ehrgott, M., (eds.) Multiple Criteria Decision Analysis: State of the Art Surveys, pp. 799–858. Springer, Boston (2005)Google Scholar
  64. 64.
    Srinivasan, V., Shocker, A.D.: Linear programming techniques for multidimensional analysis of preferences. Psychometrika 38, 337–369 (1973)MathSciNetCrossRefzbMATHGoogle Scholar
  65. 65.
    Steuer, R.E.: Multiple Criteria Optimization: Theory, Computation and Application. Wiley, New York (1986)zbMATHGoogle Scholar
  66. 66.
    Steuer, R.E., Na, P.: Multiple criteria decision making combined with finance: a categorized bibliographic study. Eur. J. Oper. Res. 150(3), 496–515 (2003)CrossRefzbMATHGoogle Scholar
  67. 67.
    Steuer, R.E., Qi, Y., Hirschberger, M.: Portfolio selection in the presence of multiple criteria. In: Zopounidis, C., Doumpos, M., Pardalos, P.M. (eds.) Handbook of Financial Engineering, pp. 3–24. Springer, New York (2008)CrossRefGoogle Scholar
  68. 68.
    Szegö, G.: Measures of risk. J. Bank. Finance 26, 1253–1272 (2005)CrossRefGoogle Scholar
  69. 69.
    Tamiz, M., Azmi, R.A., Jones, D.F.: On selecting portfolio of international mutual funds using goal programming with extended factors. Eur. J. Oper. Res. 226(3), 560–576 (2013)MathSciNetCrossRefzbMATHGoogle Scholar
  70. 70.
    Tektas, A., Ozkan-Gunay, E.N., Gunay, G.: Asset and liability management in financial crisis. J. Risk Finance 6(2), 135–149 (2005)CrossRefGoogle Scholar
  71. 71.
    von Neumann, J., Morgenstern, O.: Theory of Games and Economic Behavior. Princeton University Press, Princeton (1944)zbMATHGoogle Scholar
  72. 72.
    Wagner, H.M.: Linear programming techniques for regression analysis. J. Am. Stat. Assoc. 54, 206–212 (1959)CrossRefzbMATHGoogle Scholar
  73. 73.
    Xidonas, P., Mavrotas, G., Krintas, T., Psarras, J., Zopounidis, C.: Multicriteria Portfolio Management. Springer, New York (2012)CrossRefzbMATHGoogle Scholar
  74. 74.
    Yu, J.R., Lee, W.Y.: Portfolio rebalancing model using multiple criteria. Eur. J. Oper. Res. 209(2), 166–175 (2011)MathSciNetCrossRefzbMATHGoogle Scholar
  75. 75.
    Zopounidis, C., Pardalos, P.M.: Handbook of Multicriteria Analysis. Springer, Berlin/Heidelberg (2010)CrossRefzbMATHGoogle Scholar

Copyright information

© Springer International Publishing Switzerland 2014

Authors and Affiliations

  1. 1.School of Production Engineering and ManagementTechnical University of CreteChaniaGreece
  2. 2.Audencia Nantes School of ManagementNantes Cedex 3France

Personalised recommendations