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A mean-variance Portfolio Optimizing Trading Algorithm using regime-switching Economic Parameters

Blomgren, Jacob (2016) FMS820 20161
Mathematical 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)
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author
Blomgren, Jacob
supervisor
organization
course
FMS820 20161
year
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},
  keyword      = {nancial engineering,algorithmic trading,portfolio optimiza- tion,mean-variance criterion,regime-switching,quadratic programming,hid- den markov model},
  language     = {eng},
  note         = {Student Paper},
  title        = {A mean-variance Portfolio Optimizing Trading Algorithm using regime-switching Economic Parameters},
  year         = {2016},
}