Download this Paper Open PDF in Browser

A Profitable Trading and Risk Management Strategy Despite Transaction Cost

Quantitative Finance, Forthcoming

28 Pages Posted: 21 Nov 2009 Last revised: 16 Mar 2010

Ahmet Duran

University of Michigan at Ann Arbor

Michael James Bommarito II

LexPredict, LLC; Bommarito Consulting, LLC; Chicago-Kent College of Law - Illinois Institute of Technology; Michigan State College of Law

Date Written: October 12, 2008

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.

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

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: https://ssrn.com/abstract=1509811

Ahmet Duran (Contact Author)

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

Michael James Bommarito II

LexPredict, LLC ( email )

MI
United States

HOME PAGE: http://lexpredict.com

Bommarito Consulting, LLC ( email )

MI 48098
United States

HOME PAGE: http://bommaritollc.com

Chicago-Kent College of Law - Illinois Institute of Technology ( email )

565 W. Adams St.
Chicago, IL 60661-3691
United States

Michigan State College of Law ( email )

318 Law College Building
East Lansing, MI 48824-1300
United States

Paper statistics

Downloads
1,872
Rank
6,302
Abstract Views
6,447