 Dynamic mode decomposition for financial trading strategiesJordan Mann and J. Nathan Kutz Quantitative Finance, 2016, vol. 16, issue 11, 1643-1655 Abstract: We demonstrate the application of an algorithmic trading strategy based upon the recently developed dynamic mode decomposition on portfolios of financial data. The method is capable of characterizing complex dynamical systems, in this case financial market dynamics, in an equation-free manner by decomposing the state of the system into low-rank terms whose temporal coefficients in time are known. By extracting key temporal coherent structures (portfolios) in its sampling window, it provides a regression to a best fit linear dynamical system, allowing for a predictive assessment of the market dynamics and informing an investment strategy. The data-driven analytics capitalizes on stock market patterns, either real or perceived, to inform buy/sell/hold investment decisions. Critical to the method is an associated learning algorithm that optimizes the sampling and prediction windows of the algorithm by discovering trading hot-spots. The underlying mathematical structure of the algorithms is rooted in methods from nonlinear dynamical systems and shows that the decomposition is an effective mathematical tool for data-driven discovery of market patterns. Date: 2016 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:16:y:2016:i:11:p:1643-1655 Ordering information: This journal article can be ordered from DOI: 10.1080/14697688.2016.1170194 Access Statistics for this article Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral More articles in Quantitative Finance from Taylor & Francis Journals |
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