A Dynamic Trading Model for Use with a One Step Ahead Optimal Strategy

Amit Bhaya (), Eugenius Kaszkurewicz () and Leonardo Valente Ferreira ()
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Amit Bhaya: Federal University of Rio de Janeiro, PEE/COPPE/UFRJ
Eugenius Kaszkurewicz: Federal University of Rio de Janeiro, PEE/COPPE/UFRJ
Leonardo Valente Ferreira: Federal University of Rio de Janeiro, PEE/COPPE/UFRJ

Computational Economics, 2024, vol. 63, issue 4, No 11, 1575-1608

Abstract: Abstract This paper proposes a discrete-time model for dynamic trading, interconnecting cash and asset stocks. The trading action or control is based on the evolution of the asset prices, and any suitable asset price predictor can be used. Based on the model introduced, a one step ahead optimal control strategy, based on linear programming, is proposed. This leads to a trading algorithm which specfies a rule to buy or sell assets in a given portfolio. The addition of trade trigger logic to the basic scheme is also proposed, in order to allow return and risk to be traded off in the dynamic one step ahead trading scheme. The proposed one step ahead optimal policy is independent of the predictor of prices and their variances, chosen in this paper as the moving average, but replaceable by any desired estimator. Numerical examples are given to show that the proposed strategy performs reasonably well, with and without risk reduction, over datasets relating to different portfolios (banks, computers, ETFs and stocks).

Keywords: Dynamic trading; Linear programming; One step ahead optimal control; Discrete-time dynamical systems (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10614-023-10375-6

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