Binary switch portfolio. Issue 5 (4th May 2017)

• Record Type: Journal Article
• Authors: Li, Tengfei; Chen, Kani; Feng, Yang; Ying, Zhiliang
• Is Part Of: Quantitative finance. Volume 17:Issue 5(2017)
• Page Start: 763
• Page End: 780
• Publication Date: 2017-05-04
• Subjects: Aggregating algorithm -- Asset return -- Bayesian analysis -- Portfolio selection -- Supervised learning -- Universal portfolio; C11 -- C38 -- C44 -- G11; Finance -- Periodicals; Business mathematics -- Periodicals; Finance -- Mathematical models -- Periodicals; Investments -- Mathematics -- Periodicals; Economics -- Periodicals; Finances -- Modèles mathématiques -- Périodiques; 332.015118
• DOI: 10.1080/14697688.2016.1223337
• Languages: English
• ISSNs: 1469-7688

Abstract

Abstract: We propose herein a new portfolio selection method that switches between two distinct asset allocation strategies. An important component is a carefully designed adaptive switching rule, which is based on a machine learning algorithm. It is shown that using this adaptive switching strategy, the combined wealth of the new approach is a weighted average of that of the successive constant rebalanced portfolio and that of the 1/N portfolio. In particular, it is asymptotically superior to the 1/N portfolio under mild conditions in the long run. Applications to real data show that both the returns and the Sharpe ratios of the proposed binary switch portfolio are the best among several popular competing methods over varying time horizons and stock pools.