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Foreign exchange market modelling and an on-line portfolio selection algorithm

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  • Panpan Ren
  • Jiang-Lun Wu

Abstract

In this paper, we introduce a matrix-valued time series model for foreign exchange market. We then formulate trading matrices, foreign exchange options and return options (matrices), as well as on-line portfolio strategies. Moreover, we attempt to predict returns of portfolios by developing a cross rate method. This leads us to construct an on-line portfolio selection algorithm for this model. At the end, we prove the profitability and the universality of our algorithm.

Suggested Citation

  • Panpan Ren & Jiang-Lun Wu, 2017. "Foreign exchange market modelling and an on-line portfolio selection algorithm," Papers 1707.00203, arXiv.org.
    • Handle: RePEc:arx:papers:1707.00203
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    References listed on IDEAS

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    1. Sergio Albeverio & LanJun Lao & XueLei Zhao, 2001. "On-line portfolio selection strategy with prediction in the presence of transaction costs," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 54(1), pages 133-161, October.
    2. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
    3. Cox, John C. & Huang, Chi-fu, 1989. "Optimal consumption and portfolio policies when asset prices follow a diffusion process," Journal of Economic Theory, Elsevier, vol. 49(1), pages 33-83, October.
    4. David P. Helmbold & Robert E. Schapire & Yoram Singer & Manfred K. Warmuth, 1998. "On‐Line Portfolio Selection Using Multiplicative Updates," Mathematical Finance, Wiley Blackwell, vol. 8(4), pages 325-347, October.
    5. M. H. A. Davis & A. R. Norman, 1990. "Portfolio Selection with Transaction Costs," Mathematics of Operations Research, INFORMS, vol. 15(4), pages 676-713, November.
    6. Thomas M. Cover, 1991. "Universal Portfolios," Mathematical Finance, Wiley Blackwell, vol. 1(1), pages 1-29, January.
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