Abstract | ||
---|---|---|
In this article, we provide a new Markovian-type model for stock price trend analysis at the transaction level, and illustrate its use for trading in conjunction with a controller, which makes buy and sell decisions. Central to our formulation is a sequence of i.i.d. random variables
<inline-formula xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink"><tex-math notation="LaTeX">$T_k$</tex-math></inline-formula>
, which corresponds to the number of transactions between reversals in price direction. For a trader, this is an important indicator of the “duration” of a trend. For processes with “large”
<inline-formula xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink"><tex-math notation="LaTeX">$T_k$</tex-math></inline-formula>
, there is an incentive to try and capitalize by buying stock when a temporary trend is “up” and selling when it is “down.” The extent to which this is possible is determined by a model parameter
<inline-formula xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink"><tex-math notation="LaTeX">$p_e$</tex-math></inline-formula>
, called the
<italic xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">probability of efficiency</i>
, which indicates the likelihood that the bid, ask, and current price are such that one can seamlessly enter or exit the market without slippage. The degree to which a trader can exploit trending behavior is quantified in our main result, which provides the expected value of the trading gain resulting from a strategically constructed feedforward switching controller. This article also includes an example illustrating application of the theory using historical data. |
Year | DOI | Venue |
---|---|---|
2022 | 10.1109/TAC.2021.3086328 | IEEE Transactions on Automatic Control |
Keywords | DocType | Volume |
Algorithmic stock trading,feedforward control,financial engineering,stochastic systems | Journal | 67 |
Issue | ISSN | Citations |
2 | 0018-9286 | 0 |
PageRank | References | Authors |
0.34 | 5 | 3 |
Name | Order | Citations | PageRank |
---|---|---|---|
B. Ross Barmish | 1 | 9 | 5.25 |
James A. Primbs | 2 | 69 | 11.01 |
Sean Warnick | 3 | 198 | 25.76 |