Investment strategy due to the minimization of portfolio noise level by observations of coarse-grained entropy

Krzysztof Urbanowicz () and Janusz A. Hołyst

Physica A: Statistical Mechanics and its Applications, 2004, vol. 344, issue 1, 284-288

Abstract: Using a recently developed method of noise level estimation that makes use of properties of the coarse-grained entropy, we have analyzed the noise level for the Dow Jones index and a few stocks from the New York Stock Exchange. We have found that the noise level ranges from 40% to 80% of the signal variance. The condition of a minimal noise level has been applied to construct optimal portfolios from selected shares. We show that the implementation of a corresponding threshold investment strategy leads to positive returns for historical data.

Keywords: Noise level estimation; Stock market data; Time series; Portfolio diversification (search for similar items in EconPapers)
Date: 2004
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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:344:y:2004:i:1:p:284-288

DOI: 10.1016/j.physa.2004.06.133

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