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Investment strategy due to the minimization of portfolio noise level by observations of coarse-grained entropy

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  • Urbanowicz, Krzysztof
  • Hołyst, Janusz A.

Abstract

Using a recently developed method of noise level estimation that makes use of properties of the coarse-grained entropy, we have analyzed the noise level for the Dow Jones index and a few stocks from the New York Stock Exchange. We have found that the noise level ranges from 40% to 80% of the signal variance. The condition of a minimal noise level has been applied to construct optimal portfolios from selected shares. We show that the implementation of a corresponding threshold investment strategy leads to positive returns for historical data.

Suggested Citation

  • Urbanowicz, Krzysztof & Hołyst, Janusz A., 2004. "Investment strategy due to the minimization of portfolio noise level by observations of coarse-grained entropy," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 344(1), pages 284-288.
    • Handle: RePEc:eee:phsmap:v:344:y:2004:i:1:p:284-288
    DOI: 10.1016/j.physa.2004.06.133
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    References listed on IDEAS

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    1. J.A. Hołyst & M. Żebrowska & K. Urbanowicz, 2001. "Observations of deterministic chaos in financial time series by recurrence plots, can one control chaotic economy?," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 20(4), pages 531-535, April.
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    Cited by:

    1. Çoban, Gürsan & Büyüklü, Ali H. & Das, Atin, 2012. "A linearization based non-iterative approach to measure the gaussian noise level for chaotic time series," Chaos, Solitons & Fractals, Elsevier, vol. 45(3), pages 266-278.

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