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Portfolio Optimization, Hidden Markov Models, And Technical Analysis Of P&F-Charts

Author

Listed:
  • ROBERT ELLIOTT

    (Faculty of Management, University of Calgary, Calgary, Alberta, Canada)

  • JURI HINZ

    (Mathematisches Institut, Universität Tübingen, 72076 Tübingen, Germany)

Abstract

In this work we introduce an adaptive method of portfolio optimization. The basic idea is to describe essential movements of the stock price using a hidden Markov model and to calculate the optimal portfolio using a recursive algorithm. The portfolio optimization is adaptive in the sense that the standard EM-algorithm fits the model to historical data, which improves the portfolio performance.

Suggested Citation

  • Robert Elliott & Juri Hinz, 2002. "Portfolio Optimization, Hidden Markov Models, And Technical Analysis Of P&F-Charts," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 5(04), pages 385-399.
    • Handle: RePEc:wsi:ijtafx:v:05:y:2002:i:04:n:s0219024902001493
    DOI: 10.1142/S0219024902001493
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    Cited by:

    1. Hugh Christensen & Simon Godsill & Richard E Turner, 2020. "Hidden Markov Models Applied To Intraday Momentum Trading With Side Information," Papers 2006.08307, arXiv.org.
    2. Robert Elliott & Tak Siu, 2010. "On risk minimizing portfolios under a Markovian regime-switching Black-Scholes economy," Annals of Operations Research, Springer, vol. 176(1), pages 271-291, April.
    3. Anderson, John A. & Faff, Robert W., 2008. "Point and Figure charting: A computational methodology and trading rule performance in the S&P 500 futures market," International Review of Financial Analysis, Elsevier, vol. 17(1), pages 198-217.

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