Dynamic Portfolio Optimization Across Hidden Market Regimes
Nystrup, Peter ; Madsen, Henrik and Lindström, Erik LU
(2016)
SIAM Conference on Financial Mathematics and Engineering
- Abstract
- Regime-based asset allocation has been shown to add value over rebalancing to static weights and, in particular, reduce potential drawdowns by reacting to changes in market conditions. The predominant approach in previous studies has been to specify in advance a static decision rule for changing the allocation based on the state of financial markets or the economy. This talk proposes the use of model predictive control to dynamically optimize a portfolio based on forecasts of the mean and variance of financial returns from a hidden Markov model with time-varying parameters. There are computational advantages to using model predictive control when estimates of future returns are updated repeatedly, since the optimal control actions are... (More)
- Regime-based asset allocation has been shown to add value over rebalancing to static weights and, in particular, reduce potential drawdowns by reacting to changes in market conditions. The predominant approach in previous studies has been to specify in advance a static decision rule for changing the allocation based on the state of financial markets or the economy. This talk proposes the use of model predictive control to dynamically optimize a portfolio based on forecasts of the mean and variance of financial returns from a hidden Markov model with time-varying parameters. There are computational advantages to using model predictive control when estimates of future returns are updated repeatedly, since the optimal control actions are reconsidered anyway every time a new observation becomes available. Results from testing the approach on market data are presented and compared with previous, rule-based approaches. Further, imposing a trading penalty that reduces the number of trades is discussed as a way to increase the robustness of the approach. (Less)
Please use this url to cite or link to this publication:
https://lup.lub.lu.se/record/52fff970-3b25-460d-ba95-31351c98d0a2
- author
- Nystrup, Peter
; Madsen, Henrik
and Lindström, Erik
LU
- organization
- publishing date
- 2016-11-19
- type
- Contribution to conference
- publication status
- published
- subject
- conference name
- SIAM Conference on Financial Mathematics and Engineering
- conference dates
- 2016-11-17 - 2016-11-19
- language
- English
- LU publication?
- yes
- id
- 52fff970-3b25-460d-ba95-31351c98d0a2
- date added to LUP
- 2016-08-24 14:16:47
- date last changed
- 2019-03-08 03:24:05
@misc{52fff970-3b25-460d-ba95-31351c98d0a2,
abstract = {{Regime-based asset allocation has been shown to add value over rebalancing to static weights and, in particular, reduce potential drawdowns by reacting to changes in market conditions. The predominant approach in previous studies has been to specify in advance a static decision rule for changing the allocation based on the state of financial markets or the economy. This talk proposes the use of model predictive control to dynamically optimize a portfolio based on forecasts of the mean and variance of financial returns from a hidden Markov model with time-varying parameters. There are computational advantages to using model predictive control when estimates of future returns are updated repeatedly, since the optimal control actions are reconsidered anyway every time a new observation becomes available. Results from testing the approach on market data are presented and compared with previous, rule-based approaches. Further, imposing a trading penalty that reduces the number of trades is discussed as a way to increase the robustness of the approach.}},
author = {{Nystrup, Peter and Madsen, Henrik and Lindström, Erik}},
language = {{eng}},
month = {{11}},
title = {{Dynamic Portfolio Optimization Across Hidden Market Regimes}},
year = {{2016}},
}