Constructing smart portfolios from data driven quantitative investment models

Chetan Saran Mehra, Adam Prugel-Bennett, Enrico Gerding, Valentin Robu

Research output: Chapter in Book/Conference proceedings/Edited volumeConference contributionScientificpeer-review

Abstract

In this paper we present a smart portfolio management methodology, which advances existing portfolio management techniques at two distinct levels. First, we develop a set of investment models that target regimes found in the data over different time horizons. We then build a meta-model which uses the Kelly criterion to determine an optimal allocation over these investment strategies, thus simultaneously capturing regimes operating in the data over different time horizons. Finally, in order to detect changes in the relevant data regime, and hence investment allocations, we use a forecasting algorithm which relies on a Kalman filter. We call our combined method, that uses both the Kelly criterion and the Kalman filter, the K2 algorithm. Using a large-scale historical dataset of both stocks and indices, we show that our K2 algorithm gives better risk adjusted returns in terms of the Sharpe ratio, better average gain to average loss ratio and higher probability of success compared to existing benchmarks, when measured in out-of-sample tests.

Original languageEnglish
Title of host publication2014 IEEE Conference on Computational Intelligence for Financial Engineering and Economics, CIFEr Proceedings
EditorsRui Jorge Almeida, Dietmar Maringer, Vasile Palade, Antoaneta Serguieva
PublisherInstitute of Electrical and Electronics Engineers (IEEE)
Pages166-173
Number of pages8
ISBN (Electronic)9781479923809
DOIs
Publication statusPublished - 14 Oct 2014
Externally publishedYes
Event2014 IEEE Conference on Computational Intelligence for Financial Engineering and Economics, CIFEr 2014 - London, United Kingdom
Duration: 27 Mar 201428 Mar 2014

Publication series

NameIEEE/IAFE Conference on Computational Intelligence for Financial Engineering, Proceedings (CIFEr)

Conference

Conference2014 IEEE Conference on Computational Intelligence for Financial Engineering and Economics, CIFEr 2014
CountryUnited Kingdom
CityLondon
Period27/03/1428/03/14

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