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Creating Investment Scheme with State Space Modeling

Author

Listed:
  • Masafumi Nakano

    (Graduate School of Economics, The University of Tokyo)

  • Akihiko Takahashi

    (Faculty of Economics, The University of Tokyo)

  • Muhammad Soichiro Takahashi

    (Graduate School of Economics, The University of Tokyo)

Abstract

This paper proposes a unified approach to creating investment strategies with various desirable properties for investors. Particularly, we provide a new interpretation and the resulting formulations for state space models to attain our investment objectives, which are possibly specified as achieving target mean-variance portfolios or Sharpe ratios, and generating alphas (additional returns) over benchmark indexes. More concretely, in state space modeling to financial time-series data, we can apply the system model to representing portfolio weight processes with various constraints, as well as the standard underlying state variables such as volatility processes. Moreover, we may formulate the observation model to stand for target value processes with non-linear functions of observed and latent variables. Numerical experiments demonstrate the effectiveness of our methodology through alpha-creation against S&P 500 futures, and substantial improvement of the performance on mean-variance portfolios.

Suggested Citation

  • Masafumi Nakano & Akihiko Takahashi & Muhammad Soichiro Takahashi, 2017. "Creating Investment Scheme with State Space Modeling," CIRJE F-Series CIRJE-F-1038, CIRJE, Faculty of Economics, University of Tokyo.
    • Handle: RePEc:tky:fseres:2017cf1038
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    Citations

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    Cited by:

    1. Masafumi Nakano & Akihiko Takahashi & Soichiro Takahashi, 2018. "State Space Approach to Adaptive Artificial Intelligence Modeling: Application to Financial Portfolio with Fuzzy System," CARF F-Series CARF-F-422, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    2. Masafumi Nakano & Akihiko Takahashi & Soichiro Takahashi, 2018. "Bitcoin Technical Trading with Articial Neural Network," CIRJE F-Series CIRJE-F-1090, CIRJE, Faculty of Economics, University of Tokyo.
    3. Masaaki Fujii & Akihiko Takahashi & Masayuki Takahashi, 2017. "Asymptotic Expansion as Prior Knowledge in Deep Learning Method for high dimensional BSDEs," CIRJE F-Series CIRJE-F-1069, CIRJE, Faculty of Economics, University of Tokyo.
    4. Masafumi Nakano & Akihiko Takahashi & Soichiro Takahashi, 2018. "Bitcoin technical trading with artificial neural network," CIRJE F-Series CIRJE-F-1078, CIRJE, Faculty of Economics, University of Tokyo.
    5. Masafumi Nakano & Akihiko Takahashi & Soichiro Takahashi, 2018. "Bitcoin technical trading with artificial neural network," CARF F-Series CARF-F-430, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    6. Akihiko Takahashi & Soichiro Takahashi, 2022. "A state space modeling for proactive management in equity investment "Forthcoming in International Journal of Financial Engineering"," CARF F-Series CARF-F-543, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    7. Masafumi Nakano & Akihiko Takahashi, 2019. "A New Investment Method with AutoEncoder: Applications to Cryptocurrencies," CIRJE F-Series CIRJE-F-1128, CIRJE, Faculty of Economics, University of Tokyo.
    8. Souta Nakatani & Kiyohiko G. Nishimura & Taiga Saito & Akihiko Takahashi, 2019. "Online Appendix for Interest Rate Model with Investor Attitude and Text Mining," CIRJE F-Series CIRJE-F-1136, CIRJE, Faculty of Economics, University of Tokyo.
    9. Masafumi Nakano & Akihiko Takahashi & Soichiro Takahashi & Takami Tokioka, 2018. "On the Effect of Bank of Japan’s Outright Purchase on the JGB Yield Curve," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 25(1), pages 47-70, March.
    10. Nakano, Masafumi & Takahashi, Akihiko & Takahashi, Soichiro, 2018. "Bitcoin technical trading with artificial neural network," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 510(C), pages 587-609.
    11. Masafumi Nakano & Akihiko Takahashi & Soichiro Takahashi, 2017. "State Space Approach to Adaptive Fuzzy Modeling: Application to Financial Investment," CIRJE F-Series CIRJE-F-1067, CIRJE, Faculty of Economics, University of Tokyo.
    12. Masaaki Fujii & Akihiko Takahashi & Masayuki Takahashi, 2019. "Asymptotic Expansion as Prior Knowledge in Deep Learning Method for high dimensional BSDEs (Forthcoming in Asia-Pacific Financial Markets)," CARF F-Series CARF-F-456, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    13. Daiya Mita & Akihiko Takahashi, 2022. "Multi-Agent Model Based Proactive Risk Management For Equity Investment," CIRJE F-Series CIRJE-F-1207, CIRJE, Faculty of Economics, University of Tokyo.
    14. Souta Nakatani & Kiyohiko G. Nishimura & Taiga Saito & Akihiko Takahashi, 2019. "Online Appendix for Interest Rate Model with Investor Attitude and Text Mining," CARF F-Series CARF-F-470, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    15. Masaaki Fujii & Akihiko Takahashi & Masayuki Takahashi, 2017. "Asymptotic Expansion as Prior Knowledge in Deep Learning Method for high dimensional BSDEs," CARF F-Series CARF-F-423, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    16. Masaaki Fujii & Akihiko Takahashi & Masayuki Takahashi, 2017. "Asymptotic Expansion as Prior Knowledge in Deep Learning Method for high dimensional BSDEs," Papers 1710.07030, arXiv.org, revised Mar 2019.
    17. Souta Nakatani & Kiyohiko G. Nishimura & Taiga Saito & Akihiko Takahashi, 2020. "Interest Rate Model with Investor Attitude and Text Mining (Published in IEEE Access)," CARF F-Series CARF-F-479, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    18. Akihiko Takahashi & Soichiro Takahashi, 2022. "A State Space Modeling for Proactive Management in Equity Investment," CIRJE F-Series CIRJE-F-1197, CIRJE, Faculty of Economics, University of Tokyo.
    19. Souta Nakatani & Kiyohiko G. Nishimura & Taiga Saito & Akihiko Takahashi, 2020. "Interest Rate Model with Investor Attitude and Text Mining," CIRJE F-Series CIRJE-F-1152, CIRJE, Faculty of Economics, University of Tokyo.
    20. Masaaki Fujii & Akihiko Takahashi & Masayuki Takahashi, 2019. "Asymptotic Expansion as Prior Knowledge in Deep Learning Method for High dimensional BSDEs," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 26(3), pages 391-408, September.

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