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Binary switch portfolio

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  • Tengfei Li
  • Kani Chen
  • Yang Feng
  • Zhiliang Ying

Abstract

We propose herein a new portfolio selection method that switches between two distinct asset allocation strategies. An important component is a carefully designed adaptive switching rule, which is based on a machine learning algorithm. It is shown that using this adaptive switching strategy, the combined wealth of the new approach is a weighted average of that of the successive constant rebalanced portfolio and that of the 1/N portfolio. In particular, it is asymptotically superior to the 1/N portfolio under mild conditions in the long run. Applications to real data show that both the returns and the Sharpe ratios of the proposed binary switch portfolio are the best among several popular competing methods over varying time horizons and stock pools.

Suggested Citation

  • Tengfei Li & Kani Chen & Yang Feng & Zhiliang Ying, 2017. "Binary switch portfolio," Quantitative Finance, Taylor & Francis Journals, vol. 17(5), pages 763-780, May.
    • Handle: RePEc:taf:quantf:v:17:y:2017:i:5:p:763-780
    DOI: 10.1080/14697688.2016.1223337
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    Cited by:

    1. Yong Zhang & Hong Lin & Lina Zheng & Xingyu Yang, 2022. "Adaptive online portfolio strategy based on exponential gradient updates," Journal of Combinatorial Optimization, Springer, vol. 43(3), pages 672-696, April.

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