A posteriori multi-stage optimal trading under transaction costs and a diversification constraint

09/21/2017
by   Mogens Graf Plessen, et al.
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This paper presents a method for the evaluation of a posteriori (historical) multi-variate multi-stage optimal trading under transaction costs and a diversification constraint. Starting from a given amount of money in some currency, we analyze the stage-wise optimal allocation over a time horizon with potential investments in multiple currencies and various assets, such as, for example, assets emulating stock indices. Variants are discussed, such as unconstrained trading frequency, a fixed number of total admissable trades, and the waiting of a specific time-period after every executed trade until the next trade. Mathematical aspects are the modeling of transition dynamics as a Markov Decision Process (MDP), efficient graph generation and consequent graph search. The developed strategies are evaluated on recent real-world data dating back one year. Special focus is on the evaluation of quantitative results.

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