A novel dynamic asset allocation system using Feature Saliency Hidden Markov models for smart beta investing

نویسندگان

چکیده

The financial crisis of 2008 generated interest in more transparent, rules-based strategies for portfolio construction, with smart beta emerging as a trend among institutional investors. Whilst they perform well the long run, these often suffer from severe short-term drawdown (peak-to-trough decline) fluctuating performance across cycles. To manage short term risk (cyclicality and underperformance), we build dynamic asset allocation system using Hidden Markov Models (HMMs). We use variety construction techniques to test our resulting portfolios show an improvement risk-adjusted returns, especially on return-oriented (up 50% return excess market adjusted by relative annually). In addition, propose novel based Feature Saliency HMM (FSHMM) algorithm that performs feature selection simultaneously training HMM, improve regime identification. evaluate systematic trading real life assets MSCI indices; further, results 60% annually) model respect built full HMMs.

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ژورنال

عنوان ژورنال: Expert Systems With Applications

سال: 2021

ISSN: ['1873-6793', '0957-4174']

DOI: https://doi.org/10.1016/j.eswa.2020.113720