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Portfolio optimization, hidden Markov models, and technical analysis of P&F-charts. (English) Zbl 1107.91331

Summary: In this work we introduce an adaptive method of portfolio optimization. The basic idea is to describe essential movements of the stock price using a hidden Markov model and to calculate the optimal portfolio using a recursive algorithm. The portfolio optimization is adaptive in the sense that the standard EM-algorithm fits the model to historical data, which improves the portfolio performance.

MSC:

91G10 Portfolio theory
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[1] DOI: 10.1016/S0165-1889(97)00052-3 · Zbl 0895.90047 · doi:10.1016/S0165-1889(97)00052-3
[2] DOI: 10.1007/s007800050022 · Zbl 0907.90022 · doi:10.1007/s007800050022
[3] DOI: 10.1016/0005-1098(94)90004-3 · Zbl 0823.93061 · doi:10.1016/0005-1098(94)90004-3
[4] DOI: 10.1016/0304-4149(94)90133-3 · Zbl 0797.60036 · doi:10.1016/0304-4149(94)90133-3
[5] DOI: 10.2307/1268779 · Zbl 0762.62036 · doi:10.2307/1268779
[6] DOI: 10.1016/0304-4149(92)90141-C · Zbl 0738.62081 · doi:10.1016/0304-4149(92)90141-C
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