A mean-variance Portfolio Optimizing Trading Algorithm using regime-switching Economic Parameters
(2016) FMS820 20161Mathematical Statistics
- Abstract
- In this master's thesis a model of algorithmic trading is constructed. The
model aims to create an optimal investment portfolio consisting of a risk-free
asset and a risky asset. The risky asset is in the form of a stock generated
using regime-switching parameters with a Markov chain explaining the state
of the economy. The optimization of the portfolio is carried out under certain
assumptions and reasonable constraints on risk, transaction costs and
amount traded. The constraint on nancial risk is implemented through
the recognized mean-variance criterion, balancing the expected value of the
portfolio against the variance of the portfolio after every time period. The algorithm
is implemented using quadratic programming techniques... (More) - In this master's thesis a model of algorithmic trading is constructed. The
model aims to create an optimal investment portfolio consisting of a risk-free
asset and a risky asset. The risky asset is in the form of a stock generated
using regime-switching parameters with a Markov chain explaining the state
of the economy. The optimization of the portfolio is carried out under certain
assumptions and reasonable constraints on risk, transaction costs and
amount traded. The constraint on nancial risk is implemented through
the recognized mean-variance criterion, balancing the expected value of the
portfolio against the variance of the portfolio after every time period. The algorithm
is implemented using quadratic programming techniques in Matlab.
By varying parameters of the model a sensitivity analysis is performed. Simulated
scenarios and the behaviour of the algorithm is presented in graphs.
The algorithm is found to be rational and outperforms a static portfolio in
every scenario. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/8888858
- author
- Blomgren, Jacob
- supervisor
- organization
- course
- FMS820 20161
- year
- 2016
- type
- H2 - Master's Degree (Two Years)
- subject
- keywords
- nancial engineering, algorithmic trading, portfolio optimiza- tion, mean-variance criterion, regime-switching, quadratic programming, hid- den markov model
- language
- English
- id
- 8888858
- date added to LUP
- 2016-08-18 07:51:25
- date last changed
- 2016-08-18 07:51:25
@misc{8888858, abstract = {{In this master's thesis a model of algorithmic trading is constructed. The model aims to create an optimal investment portfolio consisting of a risk-free asset and a risky asset. The risky asset is in the form of a stock generated using regime-switching parameters with a Markov chain explaining the state of the economy. The optimization of the portfolio is carried out under certain assumptions and reasonable constraints on risk, transaction costs and amount traded. The constraint on nancial risk is implemented through the recognized mean-variance criterion, balancing the expected value of the portfolio against the variance of the portfolio after every time period. The algorithm is implemented using quadratic programming techniques in Matlab. By varying parameters of the model a sensitivity analysis is performed. Simulated scenarios and the behaviour of the algorithm is presented in graphs. The algorithm is found to be rational and outperforms a static portfolio in every scenario.}}, author = {{Blomgren, Jacob}}, language = {{eng}}, note = {{Student Paper}}, title = {{A mean-variance Portfolio Optimizing Trading Algorithm using regime-switching Economic Parameters}}, year = {{2016}}, }