A Profitable Trading and Risk Management Strategy Despite Transaction Cost
Quantitative Finance 11 (6), 829-848, 2011
28 Pages Posted: 21 Nov 2009 Last revised: 9 May 2018
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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Asset Flow and Momentum: Deterministic and Stochastic Equations
By Gunduz Caginalp and Donald Balevonich
-
Momentum and Overreaction in Experimental Asset Markets
By Gunduz Caginalp, David Porter, ...
-
Initial Cash/Asset Ratio and Asset Prices: An Experimental Study
By Gunduz Caginalp, David Porter, ...
-
By Gunduz Caginalp and Donald Balevonich
-
Financial Bubbles: Excess Cash, Momentum, and Incomplete Information
By Gunduz Caginalp, David Porter, ...
-
Overreaction, Momentum, Liquidity, and Price Bubbles in Laboratory and Field Asset Markets
By Gunduz Caginalp, David Porter, ...
-
Statistical Inference and Modelling of Momentum in Stock Prices
By Gunduz Caginalp and Greg Constantine
-
Overreaction Diamonds: Precursors and Aftershocks for Significant Price Changes
By Ahmet Duran and Gunduz Caginalp
-
Parameter Optimization for Differential Equations in Asset Price Forecasting
By Ahmet Duran and Gunduz Caginalp