Online Portfolio Selection Based on Follow-the-Loser Algorithms

Document Type : Research Paper

Authors

1 Msc., Department of Financial Engineering, Faculty of Industrial Engineering, K.N. Toosi University of Technology, Tehran, Iran.

2 Associate Prof., Financial Engineering, Faculty of Industrial Engineering, K.N. Toosi University of Technology, Tehran, Iran.

3 Msc., Department of Financial Engineering, Faculty of Financial Sciences, Kharazmi University, Tehran, Iran.

Abstract

Objective: Nowadays, the volume and speed of transactions in financial markets have grown dramatically and it is hard to track market changes by using traditional methods. Besides the efficiency of traditional methods, the low speed of these approaches is one of the most important deficiencies of them because they cannot adapt to high speed of transactions. To overcome this shortcoming, algorithmic trading techniques have been proposed which online portfolio selection is one of the most important of these techniques. So, the purpose of this research is to propose a new algorithm for online portfolio selection which leads to high risk-adjusted return and speeds up the process of portfolio selection.
Methods: In this research, two algorithms have been proposed using multi-period mean reversion which is the basis of follow-the-loser algorithms. In these algorithms, a set of various experts predict the price relative vector of next period. Then, one of existing algorithms in prediction theory with expert advice is used to assign weights to experts. Then, a learning technique is used for portfolio optimization which leads to portfolio of next period.
Results: The results show the superiority of the proposed algorithms to other algorithms existing in literature based on return and risk-adjusted return criteria.
Conclusion: The concept of mean reversion can be better expressed by using multi-period mean reversion. In addition, using different experts’ advices make predictions more accurate and therefore better portfolios are suggested. Also, the use of weighting system indirectly brings robustness in the algorithms because it reduces the weights assigned to experts with poor predictions and transforms it to other experts with proper predictions.

Keywords

References

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Financial Research Journal
Volume 22, Issue 3
2020
Pages 408-427

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