EconPapers    
Economics at your fingertips  
 

The better turbulence index? Forecasting adverse financial markets regimes with persistent homology

Eduard Baitinger () and Samuel Flegel
Additional contact information
Eduard Baitinger: FERI Trust GmbH
Samuel Flegel: FERI Trust GmbH

Financial Markets and Portfolio Management, 2021, vol. 35, issue 3, No 1, 277-308

Abstract: Abstract Persistent homology is the workhorse of modern topological data analysis, which in recent years becomes increasingly powerful due to methodological and computing power advances. In this paper, after equipping the reader with the relevant background on persistent homology, we show how this tool can be harnessed for investment purposes. Specifically, we propose a persistent homology-based turbulence index for the detection of adverse market regimes. With the help of an out-of-sample study, we demonstrate that investment strategies relying on a persistent homology-based turbulence detection outperform investment strategies based on other popular turbulence indices. Additionally, we conduct a stability analysis of our findings. This analysis confirms the results from the previous out-of-sample study, as the outperformance prevails for most configurations of the respective investment strategy and thereby mitigating possible data mining concerns.

Keywords: Persistent homology; Turbulence; Regime shifts; Investment strategy; Topological data analysis (search for similar items in EconPapers)
JEL-codes: C53 G10 G11 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://link.springer.com/10.1007/s11408-020-00377-x Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:fmktpm:v:35:y:2021:i:3:d:10.1007_s11408-020-00377-x

Ordering information: This journal article can be ordered from
http://www.springer. ... nt/journal/11408/PS2

DOI: 10.1007/s11408-020-00377-x

Access Statistics for this article

Financial Markets and Portfolio Management is currently edited by Manuel Ammann

More articles in Financial Markets and Portfolio Management from Springer, Swiss Society for Financial Market Research Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().

 
Page updated 2022-05-12
Handle: RePEc:kap:fmktpm:v:35:y:2021:i:3:d:10.1007_s11408-020-00377-x