Trading algorithms with learning in latent alpha models

06/12/2018
by   Philippe Casgrain, et al.
0

Alpha signals for statistical arbitrage strategies are often driven by latent factors. This paper analyses how to optimally trade with latent factors that cause prices to jump and diffuse. Moreover, we account for the effect of the trader's actions on quoted prices and the prices they receive from trading. Under fairly general assumptions, we demonstrate how the trader can learn the posterior distribution over the latent states, and explicitly solve the latent optimal trading problem. We provide a verification theorem, and a methodology for calibrating the model by deriving a variation of the expectation-maximization algorithm. To illustrate the efficacy of the optimal strategy, we demonstrate its performance through simulations and compare it to strategies which ignore learning in the latent factors. We also provide calibration results for a particular model using Intel Corporation stock as an example.

READ FULL TEXT
research
11/14/2022

Designing Efficient Pair-Trading Strategies Using Cointegration for the Indian Stock Market

A pair-trading strategy is an approach that utilizes the fluctuations be...
research
07/14/2020

Generating Trading Signals by ML algorithms or time series ones?

This research investigates efficiency on-line learning Algorithms to gen...
research
09/11/2023

Desenvolvimento de modelo para predição de cotações de ação baseada em análise de sentimentos de tweets

Training machine learning models for predicting stock market share price...
research
01/07/2018

Trading the Twitter Sentiment with Reinforcement Learning

This paper is to explore the possibility to use alternative data and art...
research
12/30/2017

A dynamic network model with persistent links and node-specific latent variables, with an application to the interbank market

We propose a dynamic network model where two mechanisms control the prob...
research
03/16/2019

Active and Passive Portfolio Management with Latent Factors

We address a portfolio selection problem that combines active (outperfor...
research
09/16/2021

Trading styles and long-run variance of asset prices

Trading styles can be classified into either trend-following or mean-rev...

Please sign up or login with your details

Forgot password? Click here to reset