Abstract

http://ssrn.com/abstract=1509811
 
 

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A Profitable Trading and Risk Management Strategy Despite Transaction Cost


Ahmet Duran


University of Michigan at Ann Arbor

Michael James Bommarito II


Bommarito Consulting, LLC

October 12, 2008

Quantitative Finance, Forthcoming

Abstract:     
We present a new profitable trading and risk management strategy with transaction cost for an adaptive equally weighted portfolio. Moreover, we implement a rule-based expert system for the daily financial decision making process by using the power of spectral analysis. We use several key components such as principal component analysis, partitioning, memory in stock markets, percentile for relative standing, the first four normalized central moments, learning algorithm, switching among several investments positions consisting of short stock market, long stock market and money market with real risk-free rates. We find that it is possible to beat the proxy for equity market without short selling for S&P 500-listed 168 stocks during the 1998-2008 period and Russell 2000-listed 213 stocks during the 1995-2007 period. Our Monte Carlo simulation over both the various set of stocks and the interval of time confirms our findings.

Number of Pages in PDF File: 28

Keywords: portfolio risk management, algorithmic trading, out-of-sample prediction, long memory in stocks, adaptive learning algorithm, market timing, principal component analysis, simulation

JEL Classification: G11, C6, D83, D81, G14

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Date posted: November 21, 2009 ; Last revised: March 16, 2010

Suggested Citation

Duran, Ahmet and Bommarito, Michael James, A Profitable Trading and Risk Management Strategy Despite Transaction Cost (October 12, 2008). Quantitative Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1509811

Contact Information

Ahmet Duran (Contact Author)
University of Michigan at Ann Arbor ( email )
Ann Arbor, MI 48109
United States
Michael James Bommarito II
Bommarito Consulting, LLC ( email )
Troy, MI 48098
United States
16464503387 (Phone)
HOME PAGE: http://bommaritollc.com/
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