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Optimal dynamic asset allocation using a non-linear discrete time liquidity driven microstructure market model and extended Kalman filtering

Strömberg, Anders (2006)
Department of Economics
Abstract
This paper use a discrete time microstructure model which considers excess demand and market liquidity as two unobservable state variables as determinants whether the market is overvalued or undervalued. The model expresses the variation of conditional variance of price, were the amplitude of the price changes is dependent on the liquidity of the market. It is shown that the filtered process of hidden excess demand and its liquidity is meaningful to apply in an asset allocation strategy and is efficient in terms of producing a residual money gain compared to a passive strategy.
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@misc{1334948,
  abstract     = {This paper use a discrete time microstructure model which considers excess demand and market liquidity as two unobservable state variables as determinants whether the market is overvalued or undervalued. The model expresses the variation of conditional variance of price, were the amplitude of the price changes is dependent on the liquidity of the market. It is shown that the filtered process of hidden excess demand and its liquidity is meaningful to apply in an asset allocation strategy and is efficient in terms of producing a residual money gain compared to a passive strategy.},
  author       = {Strömberg, Anders},
  keyword      = {trading,extended kalman filter,non-linear dynamics,microstructure,dynamic optimization,discrete time,asset allocation,financial markets,financial economics,control theory,Economics, econometrics, economic theory, economic systems, economic policy,Nationalekonomi, ekonometri, ekonomisk teori, ekonomiska system, ekonomisk politik},
  language     = {eng},
  note         = {Student Paper},
  title        = {Optimal dynamic asset allocation using a non-linear discrete time liquidity driven microstructure market model and extended Kalman filtering},
  year         = {2006},
}