Mixed time scale strategy in portfolio management
The fluctuation in the prices in a stock market can be separated into two time scales: a long term trend guided by financial principles and a short term trend governed by the specific trading mechanisms used. We proposed a mixed strategy for managing stock portfolios in which the long term trend is tracked by Markowitz's theory of mean variance analysis, and the short term fluctuation in stock price is monitored by a trading threshold. This strategy is tested in a two-stock portfolio formed from twenty four selected stocks in the Hang Seng Index from July 10 2007 to July 21 2009, which covers the financial Tsunami in 2008. In our mixed strategy, the test is based on a periodic trading with a period of ten trading days. At the beginning of each trading period, a two-stock portfolio that has the optimal Sharpe ratio among all the possible combination of 24 chosen stocks from the Hang Seng Index is selected using mean variance analysis. This is accomplished through a two steps process that involves a maximization of the Sharpe ratio for each pair with an implementation of the worst scenario hypothesis and a threshold that control the activation of trading. Then we examine the price fluctuation of the chosen stocks to determine the trading action. A trading threshold is proposed to facilitate the trading decision so as to ensure that the price of the selected portfolio will likely follow a rising trend on the decision day. The yield of the portfolio based on this mixed strategy is compared to the Hang Seng Index and the averaged price of the 24 stocks over the same period. The results show that this strategy of portfolio management yields a factor of 1.6 of the initial value, whereas the corresponding yield of the Hang Seng Index is a decrease in value by a factor of 0.8. Over the period of two years for the comparison, the investment using our mixed strategy in portfolio management maintains a positive return for a wide range of trading threshold, from a few days to one month. Our choice of a trading period of 10days reduces the transaction frequency in order to avoid the penalty of transaction fee. Our strategy therefore allows higher flexibility in the trading scheme for investors of different trading habits. An important observation of our strategy is that it preserves the assets over the Tsunami in 2008, which is important to conservative investors who prefer protection in the worst situation.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 23 (2012)
Issue (Month): C ()
|Contact details of provider:|| Web page: http://www.elsevier.com/locate/inca/620166|
When requesting a correction, please mention this item's handle: RePEc:eee:finana:v:23:y:2012:i:c:p:35-40. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.