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Parallel Optimization of Sparse Portfolios with AR-HMMs

Author

Listed:
  • I. Róbert Sipos

    (Budapest University of Technology and Economics)

  • Attila Ceffer

    (Budapest University of Technology and Economics)

  • János Levendovszky

    (Budapest University of Technology and Economics)

Abstract

In this paper we optimize mean reverting portfolios subject to cardinality constraints. First, the parameters of the corresponding Ornstein–Uhlenbeck (OU) process are estimated by auto-regressive Hidden Markov Models (AR-HMM), in order to capture the underlying characteristics of the financial time series. Portfolio optimization is then performed by maximizing the return achieved with a predefined probability instead of optimizing the predictability parameter, which provides more profitable portfolios. The selection of the optimal portfolio according to the goal function is carried out by stochastic search algorithms. The presented solutions satisfy the cardinality constraint in terms of providing a sparse portfolios which minimize the transaction costs (and, as a result, maximize the interpretability of the results). In order to use the method for high frequency trading (HFT) we utilize a massively parallel GPGPU architecture. Both the portfolio optimization and the model identification algorithms are successfully tailored to be running on GPGPU to meet the challenges of efficient software implementation and fast execution time. The performance of the new method has been extensively tested both on historical daily and intraday FOREX data and on artificially generated data series. The results demonstrate that a good average return can be achieved by the proposed trading algorithm in realistic scenarios. The speed profiling has proven that GPGPU is capable of HFT, achieving high-throughput real-time performance.

Suggested Citation

  • I. Róbert Sipos & Attila Ceffer & János Levendovszky, 2017. "Parallel Optimization of Sparse Portfolios with AR-HMMs," Computational Economics, Springer;Society for Computational Economics, vol. 49(4), pages 563-578, April.
    • Handle: RePEc:kap:compec:v:49:y:2017:i:4:d:10.1007_s10614-016-9579-y
    DOI: 10.1007/s10614-016-9579-y
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    References listed on IDEAS

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    1. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
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    4. Sipos, I. Róbert & Levendovszky, János, 2013. "Optimizing sparse mean reverting portfolios," Algorithmic Finance, IOS Press, vol. 2(2), pages 127-139.
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    8. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
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    Cited by:

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    2. Ying Liu & Steven Andrew Culpepper & Yuguo Chen, 2023. "Identifiability of Hidden Markov Models for Learning Trajectories in Cognitive Diagnosis," Psychometrika, Springer;The Psychometric Society, vol. 88(2), pages 361-386, June.

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